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CASE STUDY

Klausner Lumber (KL1 and KL2)

KL1 and KL2 are OUR MOST RECENT AWARD-WINNING TRANSACTIONS: 

RECOGNITION

2022 Turnaround Atlas Award for Cross Border Special Situations Deal of the Year (KL2)
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2022 TMA
Turnaround/Transaction of the Year Award For Small Company
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KL1 and KL2 were formed to build two state-of-the-art sawmills. They were intended to be the new United States operations of Austria’s Klausner family of companies.  However, after a series of operational and financial challenges, the mills found themselves in the initial stages of forced liquidation in early March of 2020 at the beginning of COVID-19.

SOURCES OF DISTRESS

  • KL1 and KL2 utilized European technology that would generate operational efficiencies and far greater utilization of raw materials, if properly harnessed. This business plan garnered substantial interest from foreign EB-5 investors, who participated in the federal program whereby a $500,000 investment into projects that created US jobs would provide green cards in return. 

 

  • Approximately $147 million was invested in KL1 to render it operational in Florida, with $49.5 million composed of Chinese EB-5 investors. Similarly, although the mill was never completed, approximately $166 million was invested in KL2, which included a $75 million EB-5 investment. Both mills had also received grants from the local governments.

  • After KL1 began production in March of 2015, sales and distribution were not as successful as planned, resulting in mounting trade debt and a continuous drain on liquidity. Additionally, by 2020, KL1’s foreign-related parties – long the source of financial support for KL1’s operations – faced challenges of their own and were, thereby, unable to provide further funding.

 

  • Furthermore, in March 2020, KL1’s entire management team and plant operators left the U.S. following the announcement of border closures by the German, Swiss, and Austrian governments due to the spread of COVID-19. Having no ability to operate, no financing, and no liquidity, KL1’s operations were shuttered immediately.

  • KL2 was never completed; had no money in the bank; no available third-party funding; no support from management, its sister company, KL1, or its European parent; and had also seen its Austrian managers leave the U.S. in anticipation of COVID-19 lockdowns. Halifax County, NC, where KL2 was located, exercised its right of reverter, repossessing the real property and leaving KL2 without ownership of its primary asset.

  • Worst of all, both mills were burdened by numerous lawsuits, particularly from the EB-5 investors who had no income from the mills and were at risk of losing a path to green cards.

BACKGROUND

RETENTION & INTERVENTIONS

RESULTS

The sale process for KL1 and KL2 was marked by innovative strategies. When Asgaard was engaged, all financial records were on the Austrian parent’s servers to which no one in America had access, and there were no employees – including financial staff – to help re-create the financial information most buyers would seek. This lack of financial documentation prevented buyers from understanding which assets were to be transferred in the 363 sale. Additionally, due to COVID-19 travel restrictions, interested parties could not fly into the U.S. to inspect the plants or equipment.

KEY ACHIEVEMENTS

  • The Asgaard KL1 CRO addressed the problems associated with the COVID-19 pandemic by employing drone videography that provided a complete virtual tour of each of the facilities, including segments that demonstrated that the equipment was indeed still operational.

 

  • KL1 was sold for approximately $63 million in August 2020. binderholz, a firm familiar with the high-tech sawmill line used in its other plants in Europe, emerged as the new owner.

  • The KL2 sales process was complicated by the fact that the county owned the real property, making a sale of the entire mill impossible. Asgaard negotiated a deal with the county, whereby it would sell the real property to the estate of KL2, enabling KL2 to sell the whole mill in a 363 auction.

 

  • KL2, despite never being completed, was sold for approximately $87 million in January 2021. Specialty EB-5 counsel to the estates structured a transaction that provided the foreign EB-5 investors, most of whom invested in KL2, a continuing opportunity to obtain green cards by keeping their investment at risk. This cleared the way for the sale, and the competitive auction for KL2 saw binderholz emerge as the new owner of KL2 as well.

  • The $150 million generated in sale proceeds was more than 10 times the estimated $15 million in forced liquidation scenarios.

  • These results prompted recognition in 2022 as two of the most successful transactions of the year. The Turnaround Marketing Association named both KL1 and KL2 as the Turnaround/Transaction of the Year for Small Company, and the Global M&A Network similarly named the KL2 deal the Cross-Border Special Situations Deal of the Year.

In March 2020, Asgaard was introduced to the situation. Asgaard realized that, if the sawmills remained shuttered and inactive, there would be a significant risk to creditor recoveries. However, there was no money available from the estates, and professionals would therefore have to work at risk until an eventual asset sale.

CONTRIBUTIONS

  • Asgaard initially focused on improving KL1 as receivership self-help actions advanced (particularly by Suwannee County, which had hired a firm to seize the debtor's equipment to pay past due property taxes). Asgaard halted the state court receiverships and liquidation efforts and moved the cases to bankruptcy court in doing so.

 

  • Despite the initial lack of interest from DIP lenders, Asgaard obtained critical DIP financing for KL1 and KL2 to be able to pay expenses required to be paid in Chapter 11, including insurance, security, and power to the sites, as well as funds to perform maintenance necessary to keep the equipment from becoming inoperable when the mills re-opened.

  • Asgaard led the operational turnaround of KL1, while simultaneously maintaining the nonoperational KL2 facility. Asgaard’s KL1 CRO relocated to the KL1 site and created conditions for showing the mill at its best to potential buyers. This included restoring local networks, rehiring key former employees, and developing strong partnerships with local authorities.

 

  • For KL2, because the county had reassumed ownership of the real property, a sale of assets on site was the only option to raise cash in the short term. Asgaard’s KL2 CRO managed to sell two pieces of mobile equipment and some miscellaneous assets to fund minimal operations. Since the county owned the real property, Asgaard negotiated with them to pay for insurance, security, and utilities at the mill.

  • To preserve value for the estate, Asgaard professionals agreed to complete all this work at risk (i.e., no material payments were made until a sale was completed, as fees were accrued but went unpaid throughout the engagement).

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