Lending into the trucking industry can be very lucrative in good times and extremely stressful when the economy shows weakness. From 2008-2010, a reduction in capacity accompanied by an increase in truck tonnage since 2010 has translated into what is still a relatively strong trucking industry.

However, the tide can shift quickly and without warning. The troubled times that began in 2008 were initially driven by the price of diesel fuel and then exacerbated with the beginning of the Great Recession. While companies have improved their ability to pass along fuel price increases via surcharges, the price of diesel remains a risk as does the ongoing uncertainty of the economy.

When the level of distress in the trucking industry increases, what is the best path to maximize your return – what should you do? Of course there isn’t just one optimal course, but I will give you a path that we have found works very well.

Background

Profitable growth during the “good times” often leads to increased equipment financing that creates a leverage issue during a subsequent economic slowdown. Many times, as financial results are worsening and debt service is becoming a challenge, the environment between the company and its various lenders is one of contention. There is also typically a lack of trust not only between the company and the various lenders but between the lenders themselves. Levels of communication between the company and the lenders may vary depending on the strength of the relationship. Leading up to the crisis, the amount of information provided typically declines, the results have turned negative, and the level of perceived credibility in management has lowered. All of these factors contribute to a challenging situation. It can be difficult to find a solution and way to maximize the return for all three parties – the company, the line lender, and the equipment lenders. From the outset, each has different agendas and focus areas but in order to effectuate a successful outcome, a joint plan is required to produce the best outcome.

The company needs to face reality and truly understand the problem at hand – hope is not a strategy. The lenders involved are most likely getting more impatient and more anxious to know how they are going to keep getting paid. The company must quickly develop a clear and concise plan to address the problems that it is facing. We have found that the best model for success is one where the pain is shared – the company makes tough decisions, the line lender provides some breathing room with day-to-day cash and equipment lenders bridge the gap between the cash flow forecast and the current debt service requirements.  With all of the constituents and conflicting agendas involved, the right financial advisor can orchestrate a win-win-win outcome. But it takes cooperation between the parties.

The Company

The company may have a lot of needs and requests from each of the lenders. However the company has to look in the mirror first and share in the pain. Often the company has been operating without a plan or has not articulated that plan very well. There may be sacred cows in terms of expenses or related party cash outflows. There may be opportunities that are more difficult to announce and implement. All options have to be placed on the table. An outside advisor that has experience in similar situations can provide a fresh look at the business and be invaluable in uncovering opportunities. Without this independent set of eyes, the company’s recovery plan can look like “the same ole same ole.” As Albert Einstein is proclaimed to have said – “insanity is doing the same thing over and over again and expecting different results.” A fresh plan with serious decisions and changes is paramount to put the lenders in a position where they feel they are not bending over backward for a company that is not serious on making the right changes. Uncrossing the lenders’ arms is a critical early step of the process.

While it is counterintuitive to most companies, increased communication and transparency into the day-to-day business with their lenders is extremely beneficial. The company’s concern is that the line lender may become over-conservative despite the fact that they may be in the strongest position of the three parties. The equipment lender is worried about the line lender’s true motives. Both of these concerns can be alleviated through opening the doors of communication.

The Line Lender

The key for the line lender is to gain visibility to what is really happening within the company. This requires increased reporting and analysis. The month-end financial statements are typically received too late; the company should determine and provide several key metrics that can provide insight as to the likely direction that the month is taking. The company should be able to provide some outlook for the month in closer to real-time fashion. This could include backlog, loads, rate, shipments per day, etc. This information will increase communication and transparency and will help reduce the lender’s anxiety that can often result in irrational behavior and decisions. When the lender sees a comprehensive improvement plan coming together, they are often willing to provide some type of support to the company. Of course, if the additional information and plan aren’t very good, then the perceived irrational behavior may in fact be quite rational.

The Equipment Lenders

The equipment lenders are often in a very “unhappy” place. They may be several payments behind, may have been treated very inconsistently with certain lenders receiving “favored nation” status. After the company has determined what it can do internally, and what the line lender may be able to assist with, there is often still a gap. The level of fixed debt service costs may still be overbearing and need to be reduced for some period of time, or permanently. The company needs to determine a plan to bridge the gap. This could involve reducing capacity and selling equipment (although arrearages and deficiencies will need to be dealt with), deferred payments, interest-only payments, permanent haircuts, debt-for-equity conversions, and many other options. The company’s negotiating position with the equipment lenders will depend on many “fuzzy” factors - the used truck market, the potential for a snowball-effect within the lender group, the customer implications, and many others.

Regardless of the plan details, there will typically be just a handful of lenders that make up the majority of the equipment debt balance. The company must get those key strategic lenders on board with a plan. That will give credibility to the plan and the smaller lenders are more likely to follow the guidance of the more prominent lenders. There will probably be lenders that have been more aggressive than others because some lenders may be receiving preferential treatment from the company. The plan needs to be transparent and any pain needs to be shared equally amongst the equipment lenders as each piece of equipment has the same approximate value to the company. The company or the financial advisor needs to be able to look everyone in the eye and communicate equitable contribution to the restructuring plan. All lenders will evaluate the decision differently, but as long as the plan provides for greater than the depreciation of equipment, the lender’s best bet is typically to go along with the proposed plan as the equipment is better off running. But, the plan needs to be achievable. The advisor can play a role in providing background and an assessment as to whether the company is a going concern or a likely bankruptcy candidate. The equipment lender should push to get key questions answered to facilitate the decision and the appropriate strategy.

• How stretched are the suppliers currently? Are there pending lawsuits? The cash flow plan may be inadequate if the supply base is going to create credit hold issues.
• Has the company made difficult decisions? Do the executives and management team feel the pain?
• Are the planned improvements reasonable, achievable, and believable? Can the management team in place implement the changes on their own or do they need assistance from a third party?
• How will progress towards the objectives be reported?
• Is there a 13-week cash flow forecast in place that is updated and reported against? This is a telltale sign as to how close to the situation management is.
• What does the line lender have to say about the situation?

While the financial advisor may represent the company or the line lender, the equipment lenders can also benefit from a quick assessment by the advisor to help answer the questions above and others in order to shed light on the situation. Obviously, these circumstances are extremely difficult but the right conductor can help orchestrate a win-win-win for everyone involved.