Towle Manufacturing is facing financial distress and needs an additional $5 million to finance inventory buildup for the upcoming spring selling season. The company's investment banker suggests evaluating the advantages and disadvantages of declaring bankruptcy versus other options to obtain financing. Declaring bankruptcy through Chapter 11 would allow the company to obtain "debt in possession" financing more easily but could disrupt the business. The CEO must decide whether to forego additional capital, try to find other lenders, or file for bankruptcy protection.

1. Its Bankrupt Towle’s Manufacturing Company Sandeep & Biswa Asian Institute of Management, Manila Catal C Associates

2. Concern of Mr. Dunphy Keeping in mind, the Towle’s Manufacturing’s spring selling season; he wanted additional $5 million to finance a buildup in inventory. As suggested by his Investment Banker, he had to evaluate the advantages and disadvantages of BANKRUPTCY compared to either foregoing the capital or trying to find it elsewhere.

4. Company Repositioning

5. More products

6. Lower Prices

7. Higher Volumes

8. Efficient and varied Distribution Channels

9. Movement from Silver to Crystal and Aluminum alloy products

10. Risk Mitigation to volatile Silver prices 48% Florence’s Inorganic growth and Brand Repositioning Strategy did a turnaround for the Towle.

12. Towle lost the confidence of some customers.

15. Regained Customer confidence in 1984

16. Limited its order, so as to fill and ship in timely manner

17. Contingent Inventory planning to avoid stock – outs and offer prompt delivery during peak selling seasons.

18. Retailers ordered less than expected

19. Labor Problems at the Massachusetts Port Authority hampered Towle’s receipt of purchased goods from suppliers.

20. Increased administrative & Inventory costs due to high returns from 4Q 1984

21. Revolving credit facility exhausted.

22. Common Stock dividends were stopped Murphy’s Law holds true, what will go wrong; shall go wrong…..

23. Paul Dunphy arrives…

25. Towle was in technical default on several provisions of its loan agreements.

26. A new group of lenders were lined for $110 mn.

27. After the 1984 reported losses, the credit terms were slightly revised.

28. No thoughtful thinking in case of acquisitions

29. No Post-Merger Integration

30. Autocratic and over ruling Leadership

31. No or very less accountability in case of Managers due to the Organizational Structure

32. No formal Profit and Loss responsibility

33. Serious deficiencies in handling of Inventory and Accounts receivables

34. No track of Customers with more than 90 days of credit

35. No accountability in terms reasoning or book keeping of product return acceptance It was unclear how much inventory the company had , nor how much of what it had was salable

36. Towle turned to be a House of Cards ready to be gone with the wind, if nothing phenomenal was done immediately…

38. Make or import silver plate, stainless steel, artificial flowers and certain other products

39. A limited number of kitchenware productsEverything else was sold out, Headcounts reduced, SKU’s drastically reduced & Profit centers were created and more authority and accountability was given on Division Managers

40. Mr. Florence was asked to resign and Mr. Dunphy takes over CEO--------Nov1985

42. More than the company’s 19 showrooms were shut down

43. More than half of workforce was victim of downsizing

45. Preferred stock dividend was omitted

46. Common stock and Promissory note were issued in lieu of cash for Series B preferred dividendBy largely reducing the working capital. Towle was able to reduce the Total Assets by $ 100 mn

48. Lenders were concerned about how well protected the target loan be

49. As per banker’s suggestion, if Towle were to file under Chapter 11, such additional financing would be in lender’s view less risky.

50. The ‘Debt in Possession’ financing following the filing, would provide enough capital to see Towle through the selling season.Dunphy was disillusioned and was weighing his options for financing

51. Mr. Dunphy at Crossroads Forego the needed Capital Simply refuse to file Chapter 11 and make a formal request of the banks for more credit Finding new set of Creditors New issue of subordinated debt* or equity* * Can not be raised without the permission of Existing Lenders and Preferred Stock holders. Chapter 11 can provide quick infusion of Capital, but Mr. Dunphy is concerned at what cost to the company…

53. Threat of default or bankruptcy and its effect on the company

55. Violation of debt agreement

56. Formal procedure for working out default

59. Debtor can negotiate with a single forum the bankruptcy court.

60. Court can allow debtor to reject unfavorable contracts.

61. All claims can be dealt with at one time.

62. Interest stops accruing on unsecured claims.

63. Bankruptcy court can affirm plan over the objections of dissenting creditors.

64. Cram down* rules apply.

65. Upon confirmation, all creditors and stockholders are bound by the plan.

67. Debtor in possession must meet stringent reporting requirements.

68. Bankruptcy court must approve all transactions outside the ordinary course of business.

69. Bankruptcy filing can trigger other claims.

70. Legal and administrative expenses paid by debtor.What weighs more for Bankruptcy? *Cram down procedure permits confirmation of a plan over the objections of one or more classes of creditors provided that, the plan provides the holders with property whose value is at least equal to the allowed amount of their claims, or else no junior class receives anything.

72. In certain situations in which debtor must seek the court’s approval; these include seeking new credit for the business; selling, leasing, or using property outside the normal course of business; accepting or rejecting unexpired leases or certain contracts

73. The additional financing with the court’s approval is generally called ‘Debt in Possession Financing’.

74. The Bankruptcy Code grants special protection to those who lend new money to bankrupt company and receive same priority as Administrative claims which are paid just after secured claims.

75. In some cases, court may grant super – priority claims that take precedence over secured claims.However the time required for the DIP financing processing is high with additional legal costs

77. Cutting back R&D and capital spending

79. Issuing new securities

80. Negotiating with creditors

81. Exchanging debt for equity

83. In spite of pending Credit Line, Bankers want to protect their interests since they predict the Company to be on the verge of being Bankrupt Financial Performance : Distressed Asset Analysis Altman Z score: Z=1.2A+1.4B+3.3C+0.6D+0.99E Z-Score = 0.185 (if below 1.8, company is a strong candidate for bankruptcy) Company is in the distressed stage and at the verge of bankruptcy.

85. Simply refuse to file Chapter 11 and make a formal request of the banks for more credit

86. Finding new set of Creditors

87. New issue of subordinated debt or equity

88. Another loss making year

89. Since the Company has not surpassed the credit line of 80% of eligible receivables and 60% of Inventory, there is a possibility

90. Difficult to find, under the present financial performance