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Crescent Resources: A Chance to Rebuild

The rapid and severe tightening of credit markets in 2007 and 2008 became the proverbial “straw that broke the camel’s back” for many companies in the real estate industry. Those firms that took on significant leverage during the preceding real estate boom found themselves saddled with unsustainable debt levels, combined with a massive liquidity crunch and virtually no transaction activity.

Due to the frozen credit markets, refinancing was not an option for most real estate companies, which also faced reappraisals of their existing portfolios and led to over-advanced positions and / or remargining. These factors forced many of these companies to undertake major financial and operational restructurings, often under the protection offered through the bankruptcy courts.

In late 2008, one company facing these same set of circumstances was Crescent Resources, a Charlotte-based real estate developer that focuses on projects in the Southeast including upscale residential communities, commercial projects (shopping centers and industrial parks) and multifamily apartment complexes.

In 2006, at the height of the real estate bubble, Crescent entered into a new credit facility totaling $1.5 billion. Almost immediately after this facility closed, the company began to experience a significant decline in profitability, primarily caused by weakness in its residential division. In response, Crescent attempted to preserve liquidity by deferring development costs and monetizing assets. However, these initiatives did not generate sufficient proceeds to overcome the increasing cash burn that the company was facing, and it continued to burn through cash at an increasing rate as the effects of the downturn intensified. As the credit markets continued to tighten, Crescent’s customers found it increasingly difficult to finance purchases from Crescent, and the company was unable to access credit markets to solve its liquidity crisis. Ultimately, the firm could not make an upcoming quarterly interest payment due on its term loan in April 2009 and entered into a forbearance agreement with its lenders.

Contingency Planning

At this point, Crescent looked to Alvarez & Marsal (A&M) for assistance in beginning restructuring negotiations with its creditors. Concurrently, while conducting out-of-court negotiations with the company’s creditors, A&M prepared contingency plans for a potential bankruptcy filing. As part of the process, A&M developed a detailed 13-week cash flow forecast to identify the rate of cash burn and implemented multiple cash conservation initiatives. Additionally, A&M was able to successfully reach an agreement with a subset of the existing lender group to provide a $110 million debtor-in-possession (DIP) financing facility. As the company was unable to reach an out-of-court solution with its creditors, the DIP facility was necessary to provide Crescent with sufficient liquidity to allow time to focus on several main priorities that would serve as the basis for its restructuring: development of a five-year business plan, liquidity preservation and cost containment, and the monetization / jettison of non-core assets.

Shoring Up Liquidity and Developing A Plan

Crescent filed for Chapter 11 Bankruptcy in June of 2009 and its Chief Executive Officer (CEO) resigned – with A&M’s Andrew Hede stepping into the dual role of both CEO and Chief Restructuring Officer (CRO) for the duration of the restructuring process.

Due to Crescent’s numerous development projects and extensive land holdings, A&M needed to take a bottom-up approach to creating a business plan by working with management to review the portfolio and categorize all assets into two separate groups: “core” and “non-core.” Core assets were identified as those with a comparatively better long-term strategic fit, potential for near-term value creation or appreciation, and with manageable carrying / holding costs. Those assets would serve as the basis for the long-term business plan and future of Crescent. The non-core assets would be targeted to be monetized over the succeeding months through an orderly disposition process to maximize proceeds and reduce the associated cash burn. The monetization of the non-core assets provided a source of cash for the company during the restructuring process and allowed it to minimize its DIP facility borrowings.

Also, as part of the portfolio review process, A&M identified opportunities for cost containment. Working with management, A&M implemented initiatives to lessen the company’s ongoing cash burn by aligning development costs with the varying sales velocities across individual projects. Their overall amenity cost structure was also rationalized by making significant reductions, while attempting not to cut too deep and destroy value at individual projects. Finally, as the non-core assets were disposed of, the overall G&A costs were reduced gradually in line with that process.

By identifying the core assets, A&M was able to realign Crescent’s operating structure to focus on the real value drivers of the business and develop a long-term business plan which would serve as the basis for its reorganization plan.

The Result

A&M, together with Crescent, its legal counsel and investment bank, negotiated the framework for the company’s reorganization plan with its largest creditors. After 11 months, Crescent emerged from Chapter 11 bankruptcy in June of 2010. As part of the court-approved plan, holders of prepetition secured debt received a combination of reinstated debt and 100 percent of the equity of the reorganized company, general unsecured creditors received an interest in a litigation trust, and the various project level lenders had their existing debt reinstated.

Crescent recovered with an improved operational focus and a significantly improved capital structure, having eliminated over $1 billion of debt from its balance sheet through the restructuring process. In addition, Crescent secured $150 million in exit financing which served to refinance the company’s outstanding DIP facility borrowings, fund exit costs, and provide working capital for the company’s operations.