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Legal Case Study
The NCS HealthCare Inc. Restructuring: Basic Lessons in How to Stave Off a Bankruptcy Liquidation of a Deeply Insolvent Publicly Held Business and in the Process Foster a $385 Million Accretion of NCS Enterprise Value in Favor of Its Stakeholders

Under the current deeply troubled and distressing economic and financial circumstances for businesses, the practical instruction provided in the NCS HealthCare restructuring, the only restructuring to remain the subject of study in law schools today and whose records are archived by the Western Reserve Historical Society, illustrates proven, pragmatic guidance to boards of directors, executive officers, and principals of challenged enterprises.

On day one of the NCS restructuring, against a depressed Wall Street banking firm enterprise valuation of approximately $175 million, NCS's primary defaulted or imminently defaulted obligations included:

  • Senior Credit Facility of $206 million
  • Debentures of $102 million
  • Prime Vendor Claim of $60 million

This indicates that in an immediate bankruptcy liquidation, the senior debt would have suffered collateral deficiency well in excess of $30 million (without regard to inevitable, significant bankruptcy case administrative costs), and the debentures and other unsecured claims totaling nearly $200 million would have received no recovery whatsoever. So, too, of course with the NCS equity shareholders.

Yet, at the conclusion of the NCS non-bankruptcy restructuring, each NCS creditor was paid in full (including all accrued contractual default interest and prepayment penalties), and each share of NCS capital stock was cashed out at $5.50 per share for an aggregate payment to NCS equity holders of $126.5 million. Thus, the NCS restructuring generated an additional $385 million (approximate) of value to the NCS stakeholders.

The topical listing below outlines the composition of and managerial steps taken by the NCS board of directors, its executive management, and restructuring professionals to produce that additional $385 million value in the culmination of the NCS non-bankruptcy restructuring.

  1. The NCS Restructuring Team. The core, day-in-and-day-out restructuring team consisted of the Chairman of the Board, Jon H. Outcalt, Sr., whose impeccable reputation for integrity and sound deportment constituted an invaluable asset in dealing with the senior lenders; Boake Sells as lead outside director whose experience as former Chairman of Revco, D.S., Inc. in its successful, four-year Chapter 11 reorganization likewise proved invaluable; and H. Jeffrey Schwartz as the legal architect of the NCS restructuring. That Boake Sells had previously relied on Jeffrey Schwartz during the Revco reorganization created a bond of credibility and trust between them that carried over to the NCS restructuring, enabling its velocity, efficiency and ultimate success.
  2. A Winning Track Record and Credibility Count. Just as Mr. Sell’s experience in the Revco Chapter 11 bankruptcy case grounded him in the crisis domain, Jeffrey Schwartz had, at that time, 20 years of consistently successful, billion-dollar, public company restructuring and bankruptcy case experience. This experience was telling when Jeffrey initially met with Senior Debt agent counsel. He was greeted by agent counsel's casual observation that NCS was hopelessly insolvent and its sole course of action was to file a liquidating bankruptcy case. The agent counsel went on to demand, on behalf of the bank group dominion of the NCS cash. Jeffrey Schwartz’s response was to casually pose a question to the agent’s counsel, “If our roles were reversed, would you advise your borrower client to agree to cash dominion?" Agent counsel's response was, “No, I guess I wouldn’t.” That ended the discussion of that topic, and NCS’s initial brush with business death. Had NCS agreed to the demand for cash dominion, all stakeholders, including the Senior Lender banks, would have incurred significant losses. To be sure, NCS continued current payment of interest (at a default rate) to the banks, which helped keep them at bay for the time being. NCS's Board Chairman, Jon Outcalt’s sterling reputation had a similar positive effect on the banks.
  3. Unencumbered Cash Is Oxygen – Protect It. The next existential bullet aimed that first year at NCS took more effort to avoid. The prime vendor of pharmaceuticals,with a daily purchase run rate of approximately $1 million payable monthly in arrears, demanded payment. After a negotiation between NCS executive management and the prime vendor, executive management in good faith presented a proposal that would have deprived NCS of most of its war chest of approximately $45 million of unencumbered cash. Accordingly, the NCS board, on advice of outside lead counsel, opted to move in another direction, thereby avoiding a second brush with a virtually certain bankruptcy liquidation demise. The NCS board directed management to develop an arrangement with an alternate prime vendor, which, if executed, would have entailed a cost of $5 million. Then the “gut check” occurred. With that option in hand, the NCS board, on advice of lead counsel, agreed to declare a repayment moratorium solely with respect to the prime vendor. That led to Jeffrey Schwartz receiving a call from the prime vendor’s highly agitated counsel. With the firm support of the NCS board, Schwartz suggested to that counsel that he think about the reality that NCS had a Wall Street investment banking firm enterprise valuation of $175 million against a senior debt of $206 million and bondholder debt of $106 million, meaning that if the prime vendor sued NCS for repayment, NCS would immediately move its business to another vendor at the one-time cost of $5 million; and if the prime vendor were to win a collection case against NCS, that would push NCS into a bankruptcy case in which the prime vendor would receive no recovery. On behalf of NCS, Jeffrey suggested to the prime vendor counsel that as a matter of fact his client’s best interests would be best served by continuing to ship its products to NCS, on a daily cash-on-delivery basis, and thus retain NCS as a $1 million-dollar-a-day customer, i.e., it was a Hobson’s choice for the prime vendor. Promptly, the prime vendor, which itself was financially distressed and therefore needed to retain NCS as a significant customer, continued to ship to NCS on that basis, and never sued NCS for the nearly $60 million it was owed but which it collected in full at the closing of the NCS restructuring.
  4. Keep Your Bondholders at Bay if the Price of Interim Peace Is Reasonable. Immediately after the prime vendor was begrudgingly constrained into informal forbearance on collecting its claim, a letter was received by NCS from a Wall Street law firm on behalf of a hedge fund that had acquired a position in the NCS bonds sufficient to direct the bondholder indenture trustee in taking actions against NCS. The letter sought from NCS the funding of a professional fee retainer for both the Wall Street law firm and an investment banking firm, citing an NCS imminent interest payment obligation of $2.25 million to the bondholders on which the hedge fund presumed NCS would soon default. Discussion at an NCS board meeting ensued. Jeffrey Schwartz pointed out to the NCS board that paying for a Wall Street law firm and investment banker for the Bondholder Ad Hoc Committee would certainly cost a seven-figure amount and, more importantly, an NCS default on the bonds would confer on the bondholders the right to file an involuntary petition to force NCS into bankruptcy. On the other hand, Jeffrey Schwartz advised that under the bond indenture payment of the near-term interest under the bonds would avoid a default under the bonds for a period of six months, requiring the Ad Hoc Bondholders’ Committee to step back for that six-month period. The NCS board, on advice of lead counsel, authorized and directed that payment be timely made. The Ad Hoc Committee receded for that six-month interval. That elicited a reflexive angry reaction from the Agent for the Senior Lender banks but no material adverse action on their part against NCS.
  5. Passage of Time Worked in NCS’s Favor. At the end of that calendar year, virtually all the Senior Lender banks, including the agent bank, traded their claims to institutions happy to have a below par basis in the Senior Loans and to receive NCS payments of default rate of interest. Among those purchasers of the Senior Loans was the hedge fund holding a controlling position of the bonds, giving those successor parties an interest in not putting NCS into a Chapter 11 liquidating bankruptcy proceeding. NCS could then breathe a sigh of relief that none of its creditors held an immediate incentive in putting NCS in a bankruptcy proceeding. An interim equilibrium of sorts had been reached.
  6. Fixing the NCS Business. On an NCS business rehabilitation track, Boake Sells worked together with NCS COO, Bill Byrum, to rehabilitate the NCS business operations. Bill Byrum, as with all other NCS officers, notably including NCS CEO Kevin Shaw, was blessed with a superior work ethic and undivided loyalty to NCS. In a meeting with the Ad Hoc Bondholders Committee, Mr. Byrum refused categorically to entertain the thought of being bought by them. In due course, the dedicated efforts of Mr. Sells and Mr. Byrum were reflected in materially improved NCS's operating results. Immediately after that meeting, Bill Byrum expressed to Jeffrey Schwartz disgust that he was asked by the chair of the Ad Hoc Bondholders Committee to "turn traitor" against NCS. All NCS stakeholders owed a profound debt of gratitude to Bill Byrum and Boake Sells for their exemplary due care and constancy of constructive purpose. Building team loyalty pays off tangibly.
  7. Never Surrender Autonomy to a Predatory Strategic Suitor Seeking Only To Be a Fire Sale Purchaser of Cherry-Picked Assets. For approximately two years, NCS’s principal competitor sought to see NCS in a liquidating bankruptcy where it could undertake due diligence from NCS and buy NCS assets at a fire-sale amount that wouldn’t begin to satisfy in full all NCS’s creditors and, of course,  would summarily wipe out NCS shareholders. When at long last another strategic suitor emerged and put forward a restructuring transaction that could be achieved outside of a bankruptcy proceeding, the NCS board, on advice of lead counsel, embraced that transaction and the lock up required by that second strategic suitor, which was on that basis permitted to conduct due diligence of NCS’s business and assets. The second strategic suitor conditioned its interest as a buyer on NCS’s entering into various lock-up provisions with NCS and its two controlling shareholders. Bearing in mind that without a non-bankruptcy restructuring transaction with the second strategic suitor NCS would remain at risk that the predatory strategic suitor could buy sufficient claims against NCS to put it into an involuntary bankruptcy, the NCS board approved NCS’s entering into a locked-up transaction with the second strategic suitor. At that time, there was a controversy had been raging relating to the application of Delaware corporate law not being applied by the Delaware Chancery Court to obtain the highest and best level of consideration for public shareholders. The long and short of it was that when the predatory strategic suitor immediately brought suit in Delaware Chancery Court and eventually removed its due diligence condition, the Delaware Supreme Court, presumably reacting to that public pressure, voided the lock up in favor of both NCS and the predatory strategic suitor. The resulting auction for NCS equity shares between the two suitors culminated in the $5.50 merger bid for each NCS share of stock and consequent assumption and payout of all NCS debt and claims at par as well as all transactional and litigation costs incurred in connection with the entire restructuring.
  8. It Was the NCS Team Effort That Produced the Success and the Additional $385 million. It was this NCS Restructuring Team that for an extended period of time staved off an NCS bankruptcy proceeding and produced the approximate $385 million value accretion for the benefit of all NCS stakeholders.
Edited 04.13.2020

"When the outlook was grim for our debt-ridden, publicly held healthcare company, we called on Jeffrey Schwartz for thoughtful and creative guidance. The result was a remarkably favorable recovery for all stakeholders. I am forever indebted to Jeffrey."
          Jon H. Outcalt, Sr., former Chairman of NCS HealthCare, Inc.

"Jeffrey Schwartz helped me lead a multibillion-dollar bankrupt company into a very profitable NYSE-listed company. He wanted the company to thrive as much as I did and worked constantly and creatively to make it happen. In a situation like this, that level of commitment is a must."

          Boake A. Sells, former Chairman and CEO, Revco, D.S., Inc.

Note from Jeffrey Schwartz: I treasure my years in the NCS Restructuring with Jon Outcalt, Sr., Boake Sells, Kevin Shaw, Bill Byrum, Thomas McKee, and Glenn Pollack (NCS investment banker and financial adviser).


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