Bankrupt firm's creditors unlikely to rubber-stamp sale

May 18, 2009

Norwood Promotional Products Inc. suggests it's positioned to sail through bankruptcy, thanks to an agreement the company already has negotiated to sell itself to a Los Angeles-based private equity firm for $133 million.

Bet on at least a few bumps along the way. Early rumblings are that creditors, which are owed nearly $300 million, don't want to go along with the proposal deal, which would leave them with substantial losses.

Indianapolis-based Norwood, the nation's No. 2 promotional products company, long has been a solid business saddled with excessive debt. And while the recession has sapped sales of logo-emblazoned golf balls, coffee cups and other products that Norwood sells and companies hand out as freebies, the declines haven't been catastrophic. Factor out interest (along with taxes, depreciation and amortization) and Norwood earned a robust $26 million last year on $312 million in sales. That compares with earnings of $40 million on sales of $325 million a year earlier.

The privately held company, which employs 109 at its downtown headquarters and 1,800 overall, filed for Chapter 11 bankruptcy May 5 after trying in vain for months to restructure debt. It faced $175 million in debt maturities over the next 10 months it couldn't pay.

The good news, according to the company: It already has lined up $30 million in bank financing to keep it operating during bankruptcy, and it has the deal in hand to sell the business to Los Angeles-based private equity firm Aurora Resurgence for $133 million in cash.

Norwood said Aurora plans to keep management in place, including CEO Paul Lage, and the deal may close by the end of June. In a press release, the company described the Aurora deal as if it were nearly a sure thing, but acknowledged the court will set bidding procedures, which could draw out higher, rival offers.

"Norwood is fortunate to have attracted not only a ... bidder, but also a lender willing to extend ... financing in what is otherwise a frozen credit market, in an amount sufficient to enable Norwood to continue operations through the consummation of a sale," attorneys for the company said in a bankruptcy court filing.

But creditors aren't feeling so lucky. As of late 2004, a few months after the company last changed hands, the business was valued at $240 million, according to documents filed in an unrelated lawsuit. That deal left ownership with a collection of lenders, including affiliates of the Dutch financial services firm ING. The Aurora deal would yield far less than lenders are owed, and—as is typical in bankruptcies—leave shareholders empty-handed.

Given those dynamics, don't be surprised to see creditors rise up against the deal, and perhaps even make a rival offer. Attorneys for secured creditors—who are first in line for repayment and are owed $146 million—declined to comment.

Like almost every company that enters bankruptcy, Norwood is playing down the potential for conflict and emphasizing that it's continuing business as usual.

Easing the nerves of customers is especially critical for Norwood, which sells through a network of 21,000 distributors that took years to cultivate.

In a statement issued after the bankruptcy filing, the company acknowledged "the term 'bankruptcy' has a negative connotation and is surrounded by fear and doubt," but urged distributors to keep the faith.

"We won't let you down," Lage said in the statement, "and we will remember all the people that supported us through this process—that is a promise."

Kite offering praised, panned

Kite Realty Group Trust on May 13 announced a whopping 25-million-share stock offering—a move that provides the leveraged company $82 million but also badly dilutes existing shares.

The Indianapolis firm is the latest in a long line of battered real estate firms selling stock in recent weeks. Kite sold its shares at $3.22, 78 percent below where they traded a year ago.

Morningstar analyst Todd Lukasik criticized the sale, noting the new shares represent a 40-percent stake in the company. "By our estimation, this equity dilution far outweighs the benefit to Kite's capital structure," he said in a report.

But Janney analyst Stephanie Krewson praised Kite for increasing its balance-sheet flexibility during tumultuous times. "As a testament to how bizarre the world has become since the credit crisis accelerated in the fall of 2008, we firmly believe management made the right decision," she wrote in a report.

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