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Cybex International, Inc., headquartered in Medway, MA, is a leading
manufacturer of premium exercise equipment for commercial and
consumer use. The company sought to refinance its existing debt
and obtain additional working capital. They approached several lenders,
including CIT Group/Business Credit.

CIT analyzed Cybex’s capital structure requirements and circumstances,
and decided the opportunity was worth pursuing. However, CIT concluded
it would need the participation of another lender to help satisfy Cybex’s
global financing requirements. They called upon Hilco Capital, the Chicagobased
financing unit of The Hilco Organization, to partner with them on the
transaction. Hilco Capital specializes in senior bridge and collateral-dependent
junior loans, last out senior participations and mezzanine loans. Within a
matter of days, Hilco capital’s staff had reviewed all aspects of the transaction
and delivered a proposal to CIT. Shortly thereafter, the deal was closed
and funded, with CIT and Hilco providing working capital and term loans
of $19 million and $11 million, respectively.

Coincidentally, less than a week later, Hilco and CIT again partnered,
this time to refinance the debt of Conbraco Industries, Inc., the Mathews,
NC-based manufacturer of brass and stainless steel valves, actuators, water
gauges, back flow preventers and safety valves. In this transaction, CIT
and Hilco provided senior facilities of $36.75 million and $9.50 million,
respectively.

These two transactions, and others involving lenders such as Wells
Fargo Foothill, GE Commercial Finance, Congress Financial, LaSalle Bank
and Fleet Capital, are representative of many more in which Hilco Capital
is able to benefit from a broad and deep understanding of value to create
additional liquidity through junior debt, thereby helping lenders win new business
or retain existing accounts. “Hilco’s sweet spot is helping to close
deals by filling the gap in a capital structure,” says Ted Koenig, CEO of
Hilco Capital. “Because we understand asset and enterprise value, we are
able to quickly recognize when there is a little more room to maneuver.
That is the core competency of the Hilco family of companies, and it’s the
foundation for a broad array of strategic services Hilco can provide to
lenders,” adds Koenig.

Understanding Asset Values Underpins Appraisal Services

While it is true that Hilco began life as a buyer and seller of distressed
assets, it was the acquired knowledge of asset values in liquidation that
led some lenders to suggest to the company that it should develop an
appraisal practice. It did, and today Hilco Appraisal Services has become
the largest appraisal provider in North America, delivering over 1,000
appraisals per year covering consumer and industrial inventory, machinery,
equipment, real estate, accounts receivable portfolios, intellectual property
and total enterprise valuations.

Appraisals are fundamental to the growing number of strategic relationships
that have evolved and flourished between Hilco and virtually all
of North America’s leading asset-based and commercial lenders. Of all the
supply-side factors affecting today’s tight credit market, arguably it is falling
collateral values which have had the most adverse effect on the levels of
senior debt financing historically provided by financial institutions. That is
why lenders are placing increased emphasis on assuring they fully understand
asset values in today’s ever-changing and highly volatile marketplace.
Understanding begins with a reliable appraisal and continues with knowledgeable
appraisal professionals who are willing to take the time to help
the lender draw meaning from the valuations provided.

“An appraisal is a judgment of value, which is based upon the
appraiser’s awareness of conditions in the marketplace that affect value.
An appraisal is used by a lender to devise exit strategies. Having confidence
in an appraisal’s quality allows a lender to feel more secure about
making credit decisions,” says Norm Adler, executive vice president of Hilco
Appraisal Services.

“Appraisals have become a cornerstone in Hilco’s relationships with
lenders,” adds Adler. “We cannot and will not advise lenders on how much
to advance against collateral, but we find ourselves collaborating more closely
than ever with lenders, providing them with guidance as it relates to the
strengths and weaknesses of their collateral in a rapidly changing marketplace.
We offer our opinions at the time an appraisal is presented, through
periodic collateral updates, and in less-formal ways many times thereafter.”

Fast service on appraisal work is also critical and central to a lender’s
ability to compete. “The outcome of an ABL transaction,” observes Adler,
“often rests on the appraiser’s ability to deliver a reliable value opinion in
a very compressed time frame.” He recalls one particular instance where
a lender ordered an appraisal of the M & amp;E and inventory in 13 manufacturing
plants, located in 13 different cities, and said they needed a report
in less than three weeks or the deal would be lost.

“We were able to meet this deadline,” Adler continues, “because we
were able to mobilize a very senior, experienced appraisal staff to conduct
our research and analysis work following our site inspections. Our appraisers
already had an intimate knowledge and understanding of the asset classes
involved and our peer review involved people from our asset disposition
group who had recently sold similar assets.”

Optimizing Value Recovery When Disaster Strikes

Working with a strategic partner who understands asset values and
how to optimize recoveries can be a boon to a lender if and when a credit
goes bad.

Hilco Real Estate was originally engaged in the Jacobson’s Department
Store Chapter 11 case to sell or renegotiate the leases on six properties.
Hilco was also engaged to provide a desktop valuation of Jacobson’s
entire real estate portfolio, encompassing 23 leased and owned properties.
The properties were located in Florida, Michigan, Ohio, Kansas, Indiana
and Kentucky. Thirteen were owned and ten leased. They ranged from
23,000 sq. ft. to 200,000 sq. ft. and included the company headquarters,
free-standing stores and mall locations.

During the Chapter 11 proceedings, a joint venture group made a global
bid to purchase all of Jacobson’s 23 remaining owned properties and leases.
Having recently completed the appraisal, Hilco recognized immediately that
the package bid would not come near to matching the recoveries available
through disposition of the properties and leases on an individual basis. Hilco
executives were successful in convincing Jacobson’s creditors to reject the
package bid and engage Hilco to dispose of all 23 remaining properties.

On September 18 and 25, 2002, Hilco conducted auctions in Detroit
and Louisville. Twelve owned properties and three leases brought $44.125
million. A number of the more desirable properties, including the company
headquarters, were deliberately withheld from auction. It was decided that
significantly higher recoveries could be attained through aggressive
marketing and negotiated sales on the individual properties.

Says Mitchell Kahn, CEO of Hilco Real Estate, “In the final analysis,
Hilco recovered $13 million more on the sale of individual properties than
would have been realized on the package bid. We could not have been so
cavalier about recommending the rejection of a sizable package bid had
we not been very confident about our value assessment and recovery
numbers. Jacobson’s was a classic case where our dual competencies as
appraisers and disposition professionals worked to everyone’s benefit.”

Putting A Deal Together By Taking It Apart

Lenders involved in financing mergers or acquisitions, or who are
banking a client that decides to divest a business unit which also happened
to be a part of the borrowing base, can look to Hilco for yet another service
tied closely to the company’s understanding of asset values. Asset Disaggregation
is the process whereby Hilco, acting as a third-party buyer,
acquires the non-strategic assets from a transaction either prior to, at or
immediately following closing.

In a typical merger, acquisition or divestiture transaction, it is highly
probable that certain assets will be declared by the prospective buyer as
redundant or non-strategic. As a consequence, the buyer will likely discount
the value of those assets, usually below the seller’s book value or at least
below what the seller believes is the fair market value. The disparity in
value between what a buyer is willing to pay and what a seller expects to
receive is often the difference between completing a deal and, at the very
best, entering into long, costly and often contentious negotiations with no
certainty for a positive outcome.

Enter Hilco. Acting as a principal buyer, using its own capital, Hilco
can commit to acquire the redundant or non-strategic assets either from
the seller prior to closing the deal, or from the buyer after closing. Either
way, asset disaggregation assures the seller of a reasonable value for assets
the buyer has discounted, and the buyer is assured that its overall acquisition
price will be reduced, as may be its leverage requirements.

Phar-Mor, Inc., a former retail drugstore chain, once operated stores
in 24 states under the names Phar-Mor, Pharmhouse and RX Place. Phar-
Mor entered bankruptcy in 1992 and closed more than 200 stores before
emerging from Chapter 11 in 1995. The company re-entered bankruptcy
in 2001 and decided to liquidate entirely.

The retail supermarket chain, Giant Eagle, wanted to purchase a portion
of Phar-Mor’s inventory, prescription lists, and store leases. However, as
another party had submitted a bid to purchase substantially all of Phar-
Mor assets, the Bankruptcy Court and Creditors’ Committee were not interested
in having a company “cherry-pick” the assets.

At this point, Hilco approached Giant Eagle and offered to partner with
the company to make a competitive bid for all of Phar-Mor’s assets. The
strategy, if successful, would enable Giant Eagle to retain the strategic assets
it desired while leaving the remaining non-strategic and/or redundant inventory,
leases, FF & amp;E and prescription lists to Hilco for subsequent disposition.
A percentage of the disposition recovery would go to Giant Eagle.

Ultimately, the Hilco/Giant Eagle joint venture bid, valued at $135
million, won the deal in a Court-approved auction, and all parties derived
benefit from the outcome. The Creditors’ Committee was satisfied with
their total recovery; Giant Eagle was able to acquire all of the assets it
wanted; Giant Eagle’s lenders were able to structure, close and fund an
acquisition financing package; and, Hilco succeeded in generating excellent
net recoveries on the remaining assets, a portion of which went to
further benefit Giant Eagle.

This asset disaggregation solution was possible only because reliable
values could be placed on the myriad of asset classes and categories
involved in the transaction. Hilco understood what was reasonable for Giant
Eagle to pay for the assets they would retain, and what recoveries could
reasonably be expected for the remaining assets in an orderly disposition.
Armed with this information, a financially-sound yet aggressive bid package
was structured, submitted and accepted.

The Differential Advantage

In the final analysis, the most successful asset-based lenders offer
more than competitive rates. They offer creativity, striving to find innovative
new ways to meet their clients’ business objectives. They offer responsiveness,
moving aggressively to accommodate their clients’ time
constraints in a business environment that will not tolerate bureaucratic
delay or worse, procrastination. And, they offer superior expertise, providing
advice and council on the most advantageous ways to structure a borrowing
package.

Fundamental to providing creativity, responsiveness and expertise is
an understanding of the value of underlying assets as well as the business
enterprise within which they exist. To many lenders, this is not typically
among their core competencies, which is why they have taken a second
look at Hilco and, today, see far more than an asset disposition company.
They see a strategic partner with asset knowledge that can be applied in
numerous ways to a singular end result: putting the deal together and getting
it done.

Richard L. Kaye is executive vice president of marketing for The Hilco
Organization. Headquartered in Northbrook, IL, Hilco is an international
leader in business asset appraisals, asset disposition and principal acquisition,
and specialized financing. Kaye has spent more than 35 years developing
and executing corporate marketing plans for manufacturers, wholesalers, distributors,
professional services firms and financial institutions.
He has authored more than 20 professional and academic
papers and numerous articles on business-to-business marketing,
and has become a recognized authority on successful
strategies and tactics for marketing business services.