As 2008 drew to a close, the US experienced one of the worst economic freefalls since 1930. Businesses in every market segment were deeply impacted by the worsening recession. The automotive industry was particularly hard-hit. Revenues decreased in excess of 40%, causing constriction throughout the industry. The ripple effect has been devastating for most businesses feeding into this industry, to include smallcap businesses like our client, a Direct Tier 1 supplier to one of the "Big Three" automakers.

Reflecting the precipitous slowdown in auto sales, our client saw revenues fall-off dramatically. Management was slow to react, failing to cut costs until it was too late to save the business.  Management decided that the practical solution was to manage an orderly liquidation.

Complicating this plan was the fact that, typical to automotive supply chains, our client manufactured a component critical to the steering function in a truck model produced by the automaker. When the automaker realized one of its suppliers was shutting down, it urgently requested MidCap's continued financing of the business. Without the parts our client provided, three to four manufacturing plants would have stopped production, putting large numbers of employees out of work, and with a continuing employee cost to the automaker. The conversation, now including the supplier, the automaker and MidCap, shifted to a way of providing support to the lender as the supplier completed work in process and produced enough new parts to keep the plants open. The goal was to give the automaker enough time to qualify a new supplier while enabling maximum recovery of the borrower's assets.

Two weeks after the supplier announced its plan to effect an orderly liquidation, MidCap, the supplier and the automaker crafted an agreement to achieve the goals of all three parties. The automaker provided cash collateral to MidCap to support advances required to keep the supplier open as it executed the production plan. It also agreed to accelerate payments on delivered product, from 45 days to 30 days, and deferred credits for raw material purchases until the loan was paid in full.

After three months the supplier repaid MidCap. MidCap released the cash collateral to the automaker, and the automaker moved its parts sourcing to a new supplier, avoiding plant interruption.

MidCap's willingness to continue to finance a distressed company and its practical approach to structuring an agreement resulted in the best possible outcome for all of the parties involved. MidCap's actions exemplify its ability to deliver business-driven credit decisions that solve problems. In a market environment of constricted credit and reactionary risk management, MidCap leads in providing effective solutions to its clients.