Recapitalization & Growth Capital

The Situation:
The CEO and majority shareholder of a business wished to restructure his company’s balance sheet to accomplish several objectives, including repurchasing the interests of a number of early-stage equity investors, replacing an amortizing senior term loan with non-amortizing debt to preserve cash flow for operating uses and increasing the company’s cash reserves to fund new product development.

The Company:
The business was a designer, manufacturer and marketer of proprietary audio/video recording devices used in law enforcement vehicles. The company was a technological leader in the marketplace and was the first to introduce direct-to-DVD recording devices. Due to the technological nature of the business and the CEO’s goal to continually update and expand the company’s product offerings, the company had expended, and planned to continuing expending, a sizable amount annually on R&D.

The Funding Request:
The CEO required sufficient funding to accomplish the stock buyback, debt retirement and growth capital targets he had set for the company. He wished to limit equity dilution so he remained in a majority ownership position, as well as limit debt-servicing costs to ensure adequate operating cash flow for annual R&D expenditures.

The Solution:
Peninsula Capital understood the multiple objectives of the recapitalization and sought to create a financing package that achieved the various funding needs while also limited equity dilution and debt-servicing costs. The solution was a two-tranche investment comprised of nearly equally-sized rounds of subordinated debt and dividend-accruing preferred stock, which made efficient use of the company’s borrowing capacity while also augmenting its equity capital base. The interest rate on the subordinated debt had both a current-pay and deferred component, increasing the base rate-of-return to help keep the equity dilution to a minimum.

Majority shareholder’s comments about working With Peninsula Capital Partners:

Why did you select Peninsula Capital to be your financial partner on this transaction?
“When we were looking to raise growth capital, we had quite a few firms show interest and we received over a half dozen investment proposals. We were very confident our company had a bright future so the number one factor for us was minimizing equity dilution. Most of the proposals we received relied heavily on equity stakes and less on guaranteed returns. Peninsula Capital carefully considered our sensitivity and provided a more sophisticated proposal that included three components; a mezzanine loan, a preferred stock investment, and warrants that could be repurchased in the future using a reasonable formula. This approach was easily the most attractive for our company.”

What was Peninsula Capital like to work with prior to closing the transaction?
“During the due diligence phase, Peninsula Capital was very thorough but at the same time they were very easy to work with. It was very clear that their team was experienced, organized, knew what to look for and what was, or was not, important. During this phase, we encountered a serious roadblock with a few of our shareholders that could have easily killed the deal. Once again, they came up with a creative solution and Peninsula Capital substantially increased their investment (with comparable terms) which allowed us to buyout some early investors and overcome the transaction obstacle.”

What was Peninsula Capital like to work with after closing the transaction?
“Our experience with Peninsula throughout the entire term was excellent. In every situation they were fair and reasonable. While our overall company trajectory was good, we had numerous bumps along the way, and some of those bumps were rather significant. Through those bumps they worked with us as partners not parents, and provided the flexibility we needed as we faced those challenges. As board members, they provided reasonable input yet generally just let us operate unencumbered.”

“Near the end of the contract term we were in a position to refinance the remaining debt and repurchase all of the warrants. Once again, Peninsula came to the negotiation table with fair and reasonable positions, and we were able to come to exit terms that truly provided a win for both companies. Now that we have concluded our partnership with Peninsula Capital and I have the benefit of hindsight, this has only reinforced in my mind that we did the right deal with the right partner.”