If every business that fell into financial hot water during the downturn had as remarkable a comeback as did Naugatuck packaging maker Custom Bottle two years ago, the recovery arc of the state and national economies might be different.
Two years after financing the then-owners’ 2004 buyout of the private company, Webster Bank found itself holding an “underwater loan” secured by the 34-year-old floundering enterprise’s assets. But once the Waterbury super-regional lender jumped in to protect its multi-million-dollar investment with a long-time borrower, Custom Bottle’s fortunes improved dramatically.
Today, Custom Bottle’s once two main businesses — distribution and manufacturing — have new owners and strong balance sheets, insiders say. Distribution has moved on, but production of clear and opaque plastic bottles and containers for everything from shampoos and rubbing alcohol to orange juice and cough syrup remains at the 67,000-square-foot hilltop plant at 10 Great Hill Road, where about 75 people still work.
Better yet for Webster, its loans to Custom Bottle have been repaid.
“I can clearly say the way Webster treated us was better than I expected,” said Richard “Rick” Allen, Custom Bottle’s former co-owner who at the time was also its operations and finance chief.
The tale of Custom Bottle’s travails and rollercoaster recovery — falling off Webster’s sick-borrower list a year before new owners came calling — is one that the bank, former company owners and a consultant involved are now eager to share, perhaps because the ending was a happy one.
Yet, the window they opened into Webster’s loan-workout regimen shows how even businesses that, from afar, appear well-run and profitable can have debilitating cracks in their business models when viewed up close.
The Custom Bottle that in late 2006 entered Webster’s workout roster was so bloated with debt that beyond buying raw materials, meeting payroll and keeping the lights on, its cash flow was too anemic to comfortably pay interest and principal on its bank loans, company and Webster workout officers say.
However, the Custom Bottle that emerged in early 2011 was leaner, with a more efficient and profitable sales and production operation, anchored with fewer employees and a winnowed customer roster.
Webster’s lender relationship with the company deepened in late 2004, when Allen and business partner, Barry Lerman of Westport, bought out the stake held by Barry’s brother, Robert Lerman. Before that, Webster had issued a line of credit to the business.
The pair got a separate loan from Webster to fund the buyout. Allen and Barry Lerman declined to specify the sum, as well as most of Custom Bottle’s financials, citing its new owners.
Until 2005, the company was in stride, churning out tens of millions of plastic bottles annually for customers along the eastern seaboard and parts of the Midwest. Sales ranged between $25 million to $50 million. Payroll peaked at 160 workers and the company was profitable.
But in rapid succession, two events turned Custom Bottle’s world — and that of its new owners — upside down.
First, in early 2005, climbing oil prices caused a spike in the cost of resins that comprise the raw plastic the company uses in its bottle production. The price spike was high enough that the company found it difficult to pass all of the added cost through to customers.
Then, its biggest hit occurred when a major client went bankrupt and Custom Bottle lost the account.
With Webster’s support and guidance from an outside consultant, the company weathered those storms. By late 2007, Custom Bottle, working from a bank-approved turnaround plan, tweaked its production operation and resin prices stabilized. The positive impact was immediate.
“As we headed into 2008,” Allen said, “we’re feeling pretty good about things — until October 2008.”
That’s the date of the near meltdown of the U.S. and global financial systems, and the unofficial start of The Great Recession.
The ripple effect of the economic slowdown caused many customers to curtail their bottle orders. Custom Bottle was back in crisis mode, but this time the help from its $20 billion-asset ally ultimately proved invaluable.
Webster’s ‘R&R’ team
Like most lenders, Webster keeps close tabs on its loan portfolio, particularly credit to commercial borrowers. Bets like these that borrowers will repay in installments over time what they owe, with interest and fees tacked on as the lender’s profit, are bankers’ sweet spot.
It was Custom Bottle, company and bank officials confirm, that flagged Webster to its mounting difficulty meeting scheduled principal and interest payments. The company needed forbearance — modification of its debt to give the owners time to get its financial house back in order.
Webster’s in-house loan troubleshooters, known as the “restructure and recovery” team, sprang into action. Bankers are loathe to risk losing money when loans sour, and will do almost anything — including liquidating a business’ assets, if that is part of the collateral securing a debt — to keep it performing.
Webster not long before had revamped its R&R unit, in response to its growing volume of troubled credits, said Erin Dorman, senior vice president and director of the R&R unit. With new-loan volume slowing, Webster assigned some of its best bankers to work there. Their task: Get struggling borrowers back on their feet — and do their best to keep them as customers.
Custom Bottle was among a combined $418.8 million in reworked loans and leases in compliance with their modified terms on Webster’s books in 2009 and 2010, according to data from the Federal Deposit Insurance Corp., regulator of federally insured banks and thrifts. In all, some 55 Connecticut lenders reported $784.7 million in compliant revised credits on their books for both years.
By the end of 2011, the year Custom Bottle exited workout, Webster’s basket of up-to-date modified credits had dwindled to $356.8 million, according to FDIC data, while the same basket for all Connecticut banks stood at $742.5 million.
“It’s easy to liquidate,” said Dorman, who has spent the past 16 in Webster’s workout division and participated in thousands of mostly small-business loan reworkings in her 24-year career. “It takes a great skill-set to work with a customer and figure out a way to restructure.”
Michigan bankruptcy lawyer Patrick Mears has seen hundreds of workouts — many of them ending up in liquidation — in his 37-year career. Mears, co-author of Strategies for Secured Creditors (second edition, ALI-CLE of Philadelphia, 2012), says the benefits of workouts ripple much wider than most realize.
“The value of a business loan workout or restructuring,” he said, “can be significant if successful and will result in large benefits to the entire community where the troubled borrower has its operations.”
Not only is the lender, typically a bank with deep local roots, repaid, but the business owners keep their equity, Mears said. Meantime, employees continue to draw paychecks to support their families. Suppliers still have a buyer for their goods and services, while state and local governments don’t suffer the loss of a taxpayer.
Webster sat down with Custom Bottle’s management to gauge the scope of its woes. The company was far from a financial basket-case, generating loads of cash making and shipping plastic containers. There just wasn’t consistently enough left over after overhead and expenses to cover its bank debt.
Typical for Webster workouts, an outside consultant — a specialist in manufacturing — was hired to comb Custom Bottle’s books and operations for strength and weakness, and to come up with ways to maximize both.
Roy Filkoff of South Windsor, who works for Altman & Co., of Staunton, Mass., drew the assignment. Filkoff, a certified public accountant, spent a dozen years with KPMG in Hartford, then served as finance chief at a pair of Connecticut manufacturers before joining Altman.
What Filkoff discovered at Custom Bottle amazed even him. The operation was going full bore, running four production shifts daily, seven days a week. Normally, that would be a good thing, except that its order volume barely warranted running the plant six days.
Worse, the manufacturing and distribution operations were run interchangeably, often landing them at cross purposes. For instance, Custom Bottle made bottles then trucked them to a Florida customer, barely turning a profit. The company had a number of other distant accounts like that one — some marginally profitable, others not.
In the world of manufacturing, maximizing profitability from production is an inexact science at best, so even a handful of profit-sapping accounts can destabilize a company’s balance sheet. That the company had operated that way for years was no surprise to Filkoff.
“High tides cover all the rocks,” said Filkoff, who is treasurer of the Turnaround Management Association of Connecticut.
Early on, Filkoff was at the Naugatuck plant at least three days a week, talking to staff, reviewing records for production, distribution and sales. Often, staff at troubled firms are skeptical of outsiders like Filkoff. The lack of trust renders them reluctant to openly share their assessments of a business’ true problems — even possible solutions.
“We do get clients who see you as the enemy or the bank’s spy,” he said. If Custom Bottle doubted him, they didn’t let on, he said.
After three weeks, Filkoff — with input from Allen and Barry Lerman — had an action plan ready for Webster’s review.
Custom Bottle’s manufacturing and distribution divisions, Filkoff reported, must each be run as separate and distinct businesses, down to dividing their accounting files. Next, shed those marginal and money-losing accounts, like the one in Florida, in favor of higher-margin business better suited to the company’s strengths.
With account volume down, production was throttled back to a more optimal five days a week, a move that in itself boosted margins. Custom Bottle raised prices for some customers, but lowered them for others, to retain profitable accounts.
Throughout the workout, the aims of Custom Bottle’s owners and Webster’s were aligned: Doing what was best for both customers and employees, and ultimately lifting cash flow high enough to get back to repaying scheduled principal and interest on the debt. During that time, the bank granted Custom Bottle forbearance, accepting a specified percentage of excess cash flow as payment toward the debt.
With the goal for rebooting the company now in clear view, Webster approved the plan.
Now, it was up to Barry Lerman, as chief executive, and Allen to implement it.
Back to good credit
Early in his career, Allen, 56, was on the lending side of the desk, working for GE Capital in Stamford.
There, he encountered his share of troubled credits and saw the harsh, unseemly side of workouts in which the borrower has no hope of survival and the lender, out of patience, is ready to pull the plug.
Not this time, he vowed.
Implementing the restructuring was far from easy. It entailed some big layoffs — shedding 15 full-time and 30 temporary workers in 2007; and another 20 full-time in February 2008. For survivors on its nonunion floor, raises and 401(k) matches grew sparse.
Webster never let Custom Bottle forget who was in charge. It periodically hiked interest rates on the debt and imposed minor fees for things like renewing its loan relationship, workout and cash-management services.
“The first year and a half (in the restructuring) was the toughest time,” Allen said.
The bank’s hovering, however, worked to Custom Bottle’s benefit more than once. The day the company was to close on $250,000 in lease financing with another unnamed financier for new equipment, Allen got a phone call that the lender had gotten cold feet. Webster stepped in to finance the lease and allowed Custom Bottle to tap another $750,000 to further upgrade its machinery.
Filkoff kept in regular touch with Custom Bottle, though not driving from his South Windsor home-office to Naugatuck as often. Over time, his hand-holding became less and less.
Except for some minor hiccups, by early 2011, Custom Bottle was no longer a patient of Webster’s R&R team. The end was as unceremonious as the start.
A year later, in May 2012, Custom Bottle sold its distribution business — Lerman Container — to Berlin Packaging in Chicago, one of the nation’s largest. Seven months after that, CKS Packaging Inc. of Atlanta, another giant, bought Custom Bottle’s manufacturing operation. Custom Bottle’s owners declined to give sales prices.
Around the time the divisions were sold, Webster was repaid in full.
Since then, Barry Lerman has moved on to his next business venture, involving a possible move to North Carolina. His embarrassment of undergoing a bank workout has faded.
“I was nervous they were going to come in and take over,” Lerman said. “The reality is they never made us feel like that.”
Allen remains at Custom Bottle on a six-month consulting retainer from CKS, and, he too is weighing other business opportunities.
He also looks back on the years spent getting back on Webster’s good-credit roster as a positive that ultimately led to him and Lerman retiring their debt much sooner than they might have.
“We’re probably the only guys,” Allen said, laughing, “who never wanted to leave the workout group.”
Greg Bordonaro contributed data analysis for this story.
