The company, formed in 2002, is a provider of engineering services, specializing in the design and development of application software for digital video and audio products. CapitalSource was approached in 2008 after the borrower tripped several covenants under their traditional bank working capital line of credit and term loans due to losses from a failed expansion.
CapitalSource worked with the referring bank and a subordinated lender to provide a complete financing solution, which allowed the borrower to execute its turnaround plan. CapitalSource provided a $2 million revolving line of credit secured by receivables—and agreed to certain terms to entice the bank—and a subordinated second lien lender to extend financing. The bank agreed to retain the term loans if CapitalSource would remit the principal and interest payments on a monthly basis directly funded from the line. Finally, the borrower secured a $1 million second lien subordinated note to cover the takeout short fall of the bank line and provide additional liquidity.
The flexibility of CapitalSource’s credit facility allowed the borrower to flush out approximately $1 million in restructuring charges between 2008 and 2009 without tripping any covenants. During this same period the borrower reduced its operating loss by over $1 million and showed continued improvement. By 2010, the borrower repaid the second lien note and began reducing term loan obligations with the bank. With the borrower’s continued success and increased profitability, the company was able to rest the CapitalSource revolving line of credit and operate from internal cash flows, and, in 2014, transition back to a standard banking relationship.
CASE STUDY WRITTEN: 06/14