The Proposal Built on a Hockey-Stick Forecast
Maple Ridge Millworks Ltd. filed a Division I proposal. The company has $900,000 of EBITDA, but its industry is contracting. The proposal offers unsecured creditors 25 cents on the dollar over five years, funded by a $1.2 million loan from the owner's family and future cash flow. The trustee's liquidation analysis shows 10 cents. The company's forecast projects EBITDA of $2.5 million by year two, based on a new contract that has not been signed, a 15% price increase, and no major capital spending. The largest unsecured creditor, a supplier owed $800,000, wants to vote against the proposal. The owner has personally guaranteed $500,000 of the company's debt. The trustee must prepare a report under the BIA on the proposal's feasibility and recommend how creditors should vote. The court has set the meeting for three weeks. The company has $150,000 of cash and a $200,000 operating line that is fully drawn.
1. Assess the reasonableness of the proposal's cash-flow forecast and the feasibility of the 25-cent offer. What assumptions should the trustee test?
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The trustee should not accept the forecast at face value. The proposal's 25-cent offer depends on a doubling of EBITDA from $900,000 to $2.5 million in two years, driven by an unsigned contract, a 15% price increase, and deferred capital spending. Each assumption needs a probability weight. The new contract is the largest driver; without it, the forecast collapses. A 15% price increase in a contracting industry is likely to cause volume loss, not margin expansion. Deferred capital spending may boost short-term cash but erodes the asset base and service quality. The trustee should build a base case, a downside case, and a liquidation case. In the base case, assume EBITDA grows modestly to $1.1 million; in the downside, it stays at $900,000 or declines. The trustee should calculate free cash flow after capital expenditures, taxes, interest, and professional fees, and compare it with the proposal payments. If unsecured claims are, say, $2.4 million, a 25% offer requires $600,000 over five years, or about $120,000 per year, plus the family loan repayment. That may be feasible at $1.1 million EBITDA but not at $900,000 with normal capex. The trustee should also review the family loan terms: is it repayable before creditors? Is it secured? The owner's guarantee is relevant to the creditors' alternative, but it is not estate property.
2. Advise the trustee on the report and voting recommendation, considering the owner's guarantee and the creditor's opposition.
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The trustee's report should be factual and balanced. It should state that the proposal is feasible only if the new contract is signed and the price increase holds; on the current evidence, the forecast is optimistic and the 25-cent offer is at risk. The trustee should not tell creditors how to vote, but it can recommend that they assess the proposal against the liquidation alternative and the guarantee. The largest creditor is owed $800,000 and may recover more by voting against the proposal and pursuing the owner's guarantee, but that depends on the owner's solvency, the guarantee's terms, and the cost of collection. A vote against the proposal leads to bankruptcy, where the liquidation analysis shows 10 cents; the guarantee may add value, but it is not certain. The trustee should also consider whether the proposal unfairly discriminates or is not in the best interests of creditors, and should disclose the owner's guarantee and any family loan. If the proposal is rejected, the trustee should be ready to administer the bankruptcy. The meeting should be run so that creditors have the trustee's report and the company's revised cash flow. The trustee's duty is to the estate and creditors, not to the owner.