Like most aerospace industry suppliers, Castle Precision Industries was still reeling from the downturn that followed 9/11, when it got another piece of bad news. The FDIC had seized the parent bank of Coast Business Credit, where the Sylmar-based manufacturer had a line of credit as well as a term loan. The immediate result Castle had no line of credit on which to draw was soon overshadowed by the second in a perfect storm that almost cost the founders of the company the entire business they had built over 35 years. The FDIC sold off Castle’s debt to Signature Capital Partners LLC, an investment fund that specializes in distressed investments, and that deal gave Signature a majority equity interest in the company if Castle defaulted. In recent weeks, Castle, which manufactures and overhauls landing gear and runs a plating division, refinanced its debt, keeping the company intact and setting it back on a financially sound course. But Castle’s experience is one that that is becoming increasingly common as more of these distressed-debt specialists enter the marketplace awash with money. “These companies like Castle, they’re stuck with a lender they never chose,” said Roberto Barragan, president of the Valley Economic Development Center, which assisted Castle in its refinancing efforts. “And here was a lender who’s not interested in the continued viability of the company. They’re only interested in getting all their money, and then some, out of their investments.” Sometimes called vulture firms, these specialized investment firms are typically the last resort of companies whose financial picture is too weak to attract traditional funding. The fund buys the debt at a bargain price, charges steep interest rates and takes over if the company defaults, a transaction some have coined “loan to own.” But one man’s vulture is simply a financial alternative to others. They counter that these funds lend to high-risk companies that cannot get funding elsewhere, and their payoff is commensurate with the risk they take. “Vultures never kill anything,” said Ron Greenspan, senior managing director at FTI Consulting Inc., which provides turnaround advisory services. “They clean up the dead debris. By definition they are making credit available to someone whose anticipated business model doesn’t justify any other financial provider. So the question is, does that type of entity pay a high cost to borrow? The answer is yes.” Whatever the viewpoint, these distressed investment specialists have been growing at a rapid clip thanks to an abundance of money chasing investments and changes in bankruptcy laws that have sent troubled companies seeking different alternatives. Just about every Wall Street investment firm now has a distressed-debt unit. “There’s a significant amount of capital available, and in looking for opportunities, one area where these investment firms have looked is in distressed debt,” said Grant Newton, professor emeritus at Pepperdine University who now is executive director of the Association of Insolvency and Restructuring Advisors. For many companies, bankruptcy is the only other alternative. But that was not the case with Castle, when its bank was seized by the FDIC in 2003 and its loan was sold to Signature in April, 2004 as part of a portfolio that Castle said was priced at $0.59 on the dollar. Officials at Signature were traveling and did not return calls by press time. Still reeling from the aftermath of 9/11, Castle’s sales had plummeted from a high of about $30 million a year to about $12 million. Though struggling, the company was able to continue making the prescribed payments. But the loan terms that the FDIC had set prior to the sale to Signature, did not amortize the entire loan at maturity, and according to those terms, Castle would still owe about $2 million at the end of the term in 2006. “They called us and said they had no interest in living with us until the amortization,” said Gary Berger, vice president and co-owner of Castle. “They wanted it paid off. And with the way the aerospace industry was going at the time, it was almost impossible to find somebody who would take them out.” As the 2006 maturity date drew closer, Berger said Signature was imposing a number of conditions on the company. “They held the loan at the default rate and one of the conditions we did manage to negotiate was, if we paid them a fee they would reduce their ability to take over the company,” Berger said. “We had to pay them a quarter of a million dollar fee so they wouldn’t have their ownership position.” With its lenders breathing down their backs, Castle’s owners contacted Barragan at the VEDC initially with the idea of enlisting his help in selling the company. By then, however, the aerospace industry was starting to turn around, and Castle was booking business with Boeing and its subcontractors, who in turn were beginning to see a dramatic uptick in their businesses. “We told them, hey, forget the sale,” said Barragan. “Your sales are up. Your profitability is up. You have a major customer who is doing great. Let’s go out into the market and look for financing based on your accounts receivable and your inventory.” The VEDC put together a package that included a $750,000 loan from the agency and took it to the agency’s loan board. Barragan said he had intended to help Castle find the additional financing elsewhere, but when one of the directors, an executive with California United Bank, looked at it, she referred her loan officers to Castle. The bank approved another $3 million in financing at market rate, and, with orders in hand and its financing secure, Castle has been able to bring on about 15 additional employees in recent weeks. “I’m looking for other companies in the same situation,” said Barragan. “When jobs become a priority, when retaining ownership for the owners becomes a priority, it falls in line with our retaining the industrial business community in the Valley and it works for everybody.” Barragan charges that the fault lies with the FDIC, which took a company that had a relationship with a regulated bank and put it in the hands of an unregulated firm that almost wiped it out in the bargain. But the FDIC counters that banks sell loans to other institutions and funds regularly, and besides, when the agency steps in as a receiver, it is obligated to make the best deal that it can make. “When a bank fails, the FDIC steps in as a receiver, and by law we are required to maximize the return for creditors of the failed bank,” said David Barr, a spokesman for the FDIC. “To fulfill that fiduciary responsibility as receiver, we sell assets of failed banks to the highest bidders.” In fact, companies that are creditworthy have more choices than ever to finance their efforts, and banks face tremendous competition for those borrowers. These specialized firms are meeting a demand others do not service, many say. “Anything that will fog a mirror, there is competition to lend to it,” said Greenspan. “The borrower may not like the terms, but it is still better than any public market will give them.” As for Castle, officials say they are simply relieved to be out of the woods. “There’s a very strong chance Castle would have gone out of business if it hadn’t been for Roberto Barragan and the VEDC jumping in and helping us out,” said William Windette, co-owner and president of Castle. “We owe them a lot and give them a lot of credit.”
