SPECIAL to CONTRACTOR
HOUSTON — Encompass Services Corp. announced Oct. 14 that it was proposing a financial restructuring plan as a “prepackaged Chapter 11.” The company is soliciting the approval of its restructuring plan from its senior and subordinated lenders, who have until Nov. 18 to respond.
Under the restructuring plan, Encompass’ creditors would own the company and existing shareholders wouldn’t get a penny. Encompass is continuing to pay its vendors on time.
“As the plan indicates we will pay suppliers in the normal course of business and we’re doing that presently,” Joe Ivey, Encompass’ president and CEO, told CONTRACTOR. “Our suppliers are key to what we do and we are trying to maintain a good relationship, especially with our national and strategic suppliers. On the mechanical side, the two that come to mind are [wholesalers] Ferguson and Hughes. There will be some others, but those are the two that come to mind in the pipe, valve and fitting business.”
Encompass officially went into default on Oct. 15 when it failed to make a $31 million principal payment on its senior debt that was due that day.
The company also announced Oct 14 that it cancelled its special meeting of shareholders, originally scheduled for the next day, and terminated its previously announced rights offering. The company said it would file a request with the Securities and Exchange Commission to withdraw the related registration statement.
“With the proposed restructuring, we are pursuing a significant improvement to our capital structure and substantially strengthening our business prospects,” Ivey said. “This plan, if approved, will significantly reduce our total debt and improve our financial flexibility.”
The financial restructuring plan would eliminate all the company’s subordinated debt, all its mandatorily redeemable preferred stock and a significant portion of its senior debt. It would significantly reduce annual cash interest payments and eliminate dividend obligations.
“We believe that this restructuring plan, if approved, will allow the company to operate its business in the ordinary course, with minimal disruption to our customers, suppliers and employees, and will provide the company with the opportunity to reach its full potential,” Ivey said.
The key components of the restructuring plan include:
1. Trade claims to the company’s vendors would be paid in the ordinary course, consistent with the company’s normal business practices and current credit terms.
2. The company’s senior secured lenders would restructure a portion of their loans into a new $200 million term loan and exchange the remaining amount for 80% of new common stock.
3. The company’s 1012% senior subordinated notes due in 2009 would be exchanged for 20% of new common stock.
4. The company’s junior subordinated notes, mandatorily redeemable convertible preferred stock, common stock and all outstanding options and warrants would be cancelled and current holders would receive nothing.
If its solicitation is successful, Encompass intends to implement the restructuring through a prepackaged Chapter 11 filing in order to complete its restructuring expeditiously. The proposal contemplates a debtor-in-possession loan for the company during the Chapter 11 proceeding.
Upon completion of the proposed restructuring, the company expects to receive a new revolving credit facility to fund general corporate purposes and working capital needs, including the issuance of letters of credit.
Although the company has not received any indication of support from its creditors for the proposed restructuring, it believes this expedited restructuring process will preserve the most value for its creditors and other constituencies, if approved.
“It’s too early to handicap it,” Ivey said. “We’ve put together a good plan for the value in the business and to enhance the value of the business, and hopefully the lenders will see that as well.”
The company said that in the event it does not receive the support required from its creditors to implement this plan, it would have to file a traditional Chapter 11.
“Encompass has had days that are better, but we’re excited over what the future looks like after we get through the issue we’re dealing with now,” Ivey said. “The future looks pretty bright. We basically have good operations with a balance sheet that is out of line right now with the current environment, and as we get the balance sheet in line our operations’ performance will continue to improve. I’m looking forward to the future.”
That future will see a smaller Encompass. The company said in an SEC filing that it “anticipates that, in the 18 to 24 months following the date hereof, it will sell certain of its non-core or under-performing assets.”
The company said it doesn’t know what those subsidiaries are yet, but nevertheless said it hopes to get $50 million net proceeds for the sales.
In its SEC filing, the company’s financial projections estimate that it will sell operations with 2002 revenues of $891 million. The firm reported total revenues for 2001 of $2.878 billion, with mechanical revenues of $1.748 billion (CONTRACTOR 2002 Book of Giants, May, pg. 19), or about 60% of total revenues. The filing prognosticates that total revenues for 2003 will fall to $1.977 billion. If mechanical revenues fall in the same proportion to total revenues, the firm will bill about $1.2 billion in mechanical revenues.
“I have mentioned that we’re in the process of selling non-strategic and under-performing assets, so that will make us a smaller company,” Ivey said, “but smaller relative to our current size rather than relative to the average size in the industry. So after the divestitures we’ll be a smaller company but still a large player.”
A likely buyer will be Norwalk, Conn.-based Emcor Group. During Emcor’s third-quarter conference call to stock market analysts on Oct. 23, Emcor officers noted that Encompass owns union contractors for which Emcor unsuccessfully bid several years ago and in which the company is still interested. Emcor said it is capitalized to make acquisitions up to $500 million.