Generating Cash from Hard-to-monetize Intangible Assets Part I: Written-off Commercial Receivables

This article is the first in a series about how bankruptcy trustees and advisors can create cash from assets that have traditionally been difficult to monetize. This installment focuses on generating cash from both highly-aged and previously written-off commercial receivables. Subsequent articles in the series will focus on creating cash from other intangible assets such as small and medium-sized preference actions, default judgments stemming from unsatisfied preference actions, and other litigation claims.

Introduction to the Opportunity

Faced with a financially distressed company or bankruptcy estate, executives and advisors are well aware that the company’s fresh accounts receivables can be a source of quick liquidity. As we all know, many of those are good candidates for asset-based lending or factoring firms that will provide limited near-term liquidity.

However, executives and advisors often neglect a meaningful source of additional cash – the highly-aged or written-off receivables. Our experience is that most asset-based lending and factoring companies won’t give you much, if any, credit for receivables that are greater than 90 days. More to the point, they probably will get quite a chuckle if you try to get them to give you cash for your write-offs from the past four years, including those that don’t even appear on the aging any longer.

Don’t let that discourage you though. The receivables and write-offs from two, three, and even four years ago can represent a significant amount of cash and should be considered in any strategy that attempts to maximize near-term liquidity.

Case Study #1 – §363 Acquisition by Major LBO Fund

The Situation

A leading private-equity fund acquired a company that had been through significant prior distress and had just emerged from bankruptcy. During the distress, the company wrote off $2 million of uncollectible receivables. A commercial collections agency that specializes in highly-aged accounts was introduced by the fund to evaluate the potential for cash generation from the oldest write-offs.

The Challenge

• The write-offs averaged 782 days old, and some were actually more then four years old.
• These receivables came from a division that was no longer in operation.
• Only paper invoices copies existed; there was no access to accounting systems.
• No proofs of delivery or any other documentation was available.

The Results

The collections agency recovered more than $500,000 from the old write-offs, providing important working capital to the company.

How to Identify the Opportunity

Now that you know that opportunities can exist to turn highly-aged receivables and historical write-offs into cash, the next key question is how to identify the opportunities in a particular case. The first step is to gather an aging schedule that lists the outstanding receivables. This is only a first step though, because while it may give you a good start on your list of aged receivables, it likely only shows part of the picture. CFOs and turnaround professionals often indicate to us that the “company’s A/R is very clean and DSO (days sales outstanding) is better than the industry average.” However, further digging often reveals an interesting insight – that the A/R looks so clean because the company has routinely written off accounts to artificially maintain a low DSO, often not even showing up as a footnote on the aging schedule!

Therefore, be prepared to dig around into old reports and records to find these receivables. Remember, if they were easy to find and collect, then they wouldn’t be overlooked so often. Based on our experience, approximately 75 percent of stable companies have significant write-offs that are still collectible. In distressed situations, this percentage rises to over 90 percent. In fact, in the last two years alone, we’ve created cash from highly-aged receivables and historical write-offs for well over 50 different clients.

Options for Capturing the Opportunity

Now that you know that a specific opportunity exists in one of your cases, the next key question is how to best capture the opportunity. There are three basic options that are discussed in detail here: (A) Collect internally, (B) Outsource on a contingency basis, or (C) Sell for cash.

A. Collect Internally

Use this option when you have resources available internally, particularly people that are adept at being proactive and taking a problem-solving approach. Often we find that executives and turnaround professionals make the mistake of assuming that the company’s existing credit and collections personnel are well-suited for such activity. It is quite tempting because they “know the accounts” and are “familiar with the situations.” However, we find that this can often be a mirage; chances are these people had limited success before and are unlikely to find alternative paths to success now.

B. Outsource on a Contingency Basis

If you don’t have the resources to collect internally, then consider outsourcing the collection effort on a contingency basis. Many firms have existing relationships with collections agencies that perform well on accounts less than a year old. Our caution here however, with specific reference to the topic at hand, is that many of these agencies will struggle with commercial accounts one-four years old and often won’t even apply much effort toward these accounts. An example is provided in the box below.

As you know, aged receivables and historical write-offs often have limited documentation and are rife with disputes. It takes a specialized agency to have success with these types of accounts, particularly the prior write-offs. Specifically, we find that a “call center” type of agency with hourly employees working from a dialer and script will not have the time or wherewithal to sort through the complex issues often found in these more distressed situations. Conversely, an agency with highly experienced collectors that are empowered to utilize a thoughtful and creative approach – a consultative approach – will show dramatically higher rates of success. As a result, it’s important in these situations to partner with a lower-volume, higher-service agency to generate success and, most importantly, recover cash!

Given the complex nature of this work, you should expect a specialty agency to charge between 20-45percent of recoveries on these highly-aged accounts and write-offs. Since these recoveries often create “found” money, the more incentive provided to the agency, the more net cash you can expect to be generated.

Additionally, for advisors representing bankrupt companies, we recommend selecting an agency or a buyer (per the section below) that has prior experience being approved in accordance with the bankruptcy proceeding.

Case Study #2 – Commercial Bank Takes Over Assets from Liquidated Borrower

The Situation

A leading commercial bank had taken over all the assets of a liquidated customer that was in default on its loan from the bank. The bank had already liquidated PP&E and collected lock-box receivables, but was still “underwater” and wanted to recover cash from a portfolio of written-off receivables.

The Challenge

• The borrower had ceased as an operating business roughly two years prior, further complicating the collections activity.
• The bank had already sent the accounts to a “traditional” collections agency about a year after the liquidation; however, the agency opened up the boxes, identified the age of the files and sent them back to the bank.
• Many of those owing the receivables were also owed trade credits and wanted to return unsold products in accordance with past practice.

The Results

A collections agency that specializes in highly-aged accounts worked through a myriad of issues, ultimately generating meaningful cash from the old write-offs and helping the bank further recover its loan.

C. Sell for cash

If time, simplicity and the need for immediate cash are the key considerations, then an outright sale of the highly-aged receivables and written-off accounts may make sense. Although few in number, a select number of buyers exist for these aged commercial accounts. The commercial area differs dramatically from the credit card market, where buyers are abundant. A key reason for the difference is that credit card portfolios have common characteristics, whereas commercial receivables tend to have unique attributes from one company to the next. For instance, credit applications can differ dramatically, as do ordering forms, invoices and proofs of delivery. A buyer for commercial receivables must be able to quickly assess the available documentation, which is often quite limited, and make a meaningful proposal in short order.

Such purchases will typically include a short timeframe for recourse by the buyer on accounts deemed invalid, and then will typically shift into a nonrecourse situation. Depending on pricing and documentation, the sale can sometimes even be done on a modified as-is, where-is basis, with limited representations by the seller.

Summary of Options to Capture the Opportunity

Conclusion

Bankruptcy trustees and restructuring advisors have an extremely valuable outlet when it comes to turning highly-aged receivables and write-offs into much needed cash. As this article demonstrates, an agency that specializes in distressed situations – whether it be on a contingency or cash purchase basis – can provide significant money that otherwise would be “left on the table.” Nearly every bankruptcy estate and distressed company sits on these types of portfolios, so it is simply a matter of identifying the right partner and gathering those lost accounts. This article will be a useful guide as you now look to monetize these intangible assets.

Description of Oak Point Partners

David Linn is a vice president at Oak Point Partners, which creates “found money” from assets such as highly-aged commercial receivables (one to four years old), bankruptcy preference claims, default judgments and nonperforming leases/loans. We are equally willing to either purchase portfolios outright for cash upfront or work them on a contingency basis where we keep a percentage of the recovery.  In either case, we handle all claims very professionally via our wholly-owned and operated agency, C&W Consultants.  C&W has a 20-year track record of success, utilizing a consultative approach to collections that generates strong results, satisfied clients and recurring business relationships.

David can be reached via email at david@oakpointpartners.com or by phone at 212-245-3033. More information can also be found at www.oakpointpartners.comand www.cwcollects.com.