A leader across multiple sectors, Milacron used an asset-based loan (ABL) to stage a turnaround, pursue a merger and position itself for growth. The company’s success highlights the benefits of having a predictable source of capital and financial flexibility, especially for businesses in cyclical industries.
A leader in many categories
Founded in 1884, Milacron grew from the former Cincinnati Milling Machine Company into the world’s largest machine tool manufacturer in the 1930s. By 2008, it had expanded into metalworking and cooling fluid, plastic injection molding machinery and grinding machines for the auto industry. Milacron serves customers worldwide in a variety of industries and is the dominant player in many categories.
Despite its position as the world’s broadest-range supplier to the plastics processing industry, Milacron chose to file for bankruptcy protection in March 2009, as a result of a liquidity shortfall brought on by the global economic recession and substantial cash pension funding obligations.
In 2008 and 2009, demand from Milacron’s customers in the plastics processing machinery portion of the manufacturing sector decreased significantly, driven by high oil and resin prices and the slowdown in the automotive and construction sectors.
Milacron has since emerged from bankruptcy protection. The company solidified its position as a leading supplier of plastics processing solutions with its 2013 acquisition of Mold Masters, the leading manufacturer of a comprehensive line of plastic delivery and precision control systems for injection molding applications. The purchase of Mold Masters provided Milacron with the widest range of plastics processing equipment, technologies and services in the world.
A TURNAROUND TOOL
Milacron’s rebirth highlights asset-based financing as a tool that offers companies the liquidity and financial flexibility to effect a turnaround.
“Milacron is a highly recognized name and well-positioned in its markets,” says Ira Kreft, senior vice president for Bank of America Business Capital. “Bank of America has significant experience in financing turnarounds. However, there are special challenges in structuring an ABL financing for a company that is in a capital-intensive industry, with a long build cycle. Not all companies make for a good ABL deal, but with our vast experience across a wide number of industries, we are able to deliver a financing structure that enables management teams to execute their strategy and initiatives.”
BANKRUPTCY EMERGENCE AND GROWTH
In August 2009, the company emerged from bankruptcy, when it was purchased by private equity group Avenue Capital. It used an asset-based credit facility to help finance the bankruptcy emergence. Since the bankruptcy emergence, Milacron has undertaken significant restructuring actions, including manufacturing facility closures and employee headcount reductions, to right-size its business.
In April 2012, an affiliate of private equity firm CCMP Capital Advisors, LLC, purchased Milacron. Bank of America Business Capital led the $60 million asset-based loan credit facility that was used to help finance the acquisition. Milacron chose to increase the existing asset-based loan credit facility size to $100 million to help finance its purchase of Mold Masters in March 2013. The asset-based loan credit facility includes an $80 million subline for borrowing in the U.S., and a $20 million subline for borrowing in Canada.
A PREDICTABLE SOURCE OF CAPITAL
“The company’s asset-based credit facility provides the company a predictable source of available capital, as its credit capacity is based on asset values rather than based on the company’s recent earnings stream,” says Jason Riley, senior vice president at Bank of America Business Capital. “We find that this reliable access to liquidity is especially important to customers who operate in cyclical industries, as their earnings can fluctuate due to external factors beyond their control.”
Riley continues, “The Milacron asset-based loan facility calculates borrowing availability based on the sum of 85% of its eligible accounts receivable plus the lesser of a) 65% of the lesser of cost or market value of eligible inventory and b) 85% of the estimated liquidation value of its eligible inventory. The credit facility only includes a financial covenant to be measured if the company’s borrowings under the credit facility reach a substantially high percentage of the company’s credit facility borrowing availability.”
Riley argues that this structure makes asset-based lending more attractive to companies in a variety of industries. “We find that companies often need access to capital the most when their operating performance drops to a level that is below historical norms” says Riley. “Because ABL credit facilities calculate borrowing availability based on asset values instead of on a multiple of recent earnings, ABL financing can provide companies with access to needed capital during times when they may not be generating positive cash flow from operations.”
BENEFITING CYCLICAL BUSINESSES
Riley reiterates his view that asset-based loans can be most beneficial for companies that operate in cyclical industries. “We love to lend to manufacturers and distributors that operate in cyclical industries, and they make up a significant portion of our long-term customers. Non-ABL bankers tend to view the risk associated with companies in cyclical industries differently than we do.”
Many companies keep asset-based credit facilities to access capital during a downturn in their business cycles. The absence of all-times financial covenants and fewer and less restrictive covenants in many ABL credit facilities can allow managers of businesses to make investment decisions based on the long-term strategic benefits. Many ABL facilities offer significant flexibility with respect to permitted payments for business acquisitions and owner distributions.
“ABL credit facilities can provide businesses with a lot more operating flexibility compared to cash flow-based credit facilities,” Riley says. “The pricing of ABL credit facilities is fairly comparable to cash flow-based credit facilities, and typically with more certainty of available capital when it is needed most. And with the technological advances that BofAML has made, the periodic reporting stigma often associated with ABL is far less onerous.”
Case studies are for illustrative purposes only and intended to demonstrate the capabilities of Bank of America Merrill Lynch. You should not consider these case studies as an endorsement of Bank of America Merrill Lynch. Case studies do not necessarily represent the experiences of other clients, nor do they indicate future performance. Results may vary.
- Milacron went from bankruptcy to business growth with the help of asset-based loans
- ABL provides a reliable source of capital when it’s needed most, which is especially important in cyclical industries
- Businesses gain liquidity and financial flexibility to execute restructurings, acquisitions and other critical initiatives