In the wake of netting agreement from the majority of its creditors on a plan to reorganize the company, Mercedes Homes has asked U.S. Bankruptcy Court judge Paul G. Hyman Jr. of the Southern District of Florida to conditionally approve it during a meeting July 21 and send it out for creditors to vote.
If approved by the judge and the creditors, the judge could make a final decision on the plan as early as Aug. 31.
Last week, Mercedes announced that it hopes to do something that is rare, pull the company out of Chapter 11 as a going concern and do it by Sept. 30, eight months after filing for court protection. The company filed for court protection in the Southwest Florida Division of the U.S. Bankruptcy Court in late January.
The downside is that it means turning over all the stock in the employee-owned company to one of its primary creditors, a company with the generic name Real Estate Investment Ventures. The old stock, which is held by employees and the company's founding family, the Bueschers, who own about 44% of the total, would likely disappear.
Management of the company, however, will remain the same, Mercedes said Monday in an e-mail response to questions. It also said that for now the employee stock options plan (ESOP) stock remains in a trust, but that, upon confirmation of the plan, it will likely dissolve, leaving the Bueschers and the company's employee stockholders with nothing.
In bankruptcy, employee stockholders in ESOP companies are treated the same as stockholders in public companies, they are on the bottom of the totem pole of creditors, said Rocky Fiore, a vice president of Prairie Capital, a company that advises companies on ESOPs.
"When those kinds of things happen, you are at the mercy of your creditors," said Fiore. "The ESOP is a shareholder just like any kind of shareholder. This [bankruptcy] might have been the only viable alternative to keep them employed."
Unlike other home builders with newer ESOP plans that are still burdened with the debt it usually requires to start the programs, Mercedes has been an ESOP-owed company since 1982 and had no debt related to its plan, the company said.
Under the proposed reorganization plan, the company's other primary creditor, the banks that issued the company a revolving line of credit, would restructure their debt to the company, issuing loans to cover 90% of the $140 million they are owed. Mercedes said Monday it is still putting the final edits on the new bank terms sheet but that the debt will have maturities of as long as four years.
In addition to the general problems related to the depressed home building market, problems with that line of credit were a strong contributing factor to the company's filing for bankruptcy protection in late January, Mercedes said in bankruptcy documents. While Mercedes was current on its payments on the debt, other covenants on the loan were triggered. Mercedes negotiated forbearance on those violations, but they expired Jan. 29.
Other problems with access to cash that popped up for Mercedes in late 2008 were another factor, the documents said. One of the banks behind the company's revolving line of credit, Franklin Bank, was taken over by the Federal Deposit Insurance Corp. (FDIC) last December, and the FDIC refused to honor a draw request by Mercedes even though other lenders in the revolver consortium agreed to fund their share of the draw.
Other details of the proposed reorganization plan call for the $1-million-plus of taxes the company owes and priority unsecured claims of $765,646 to also be paid in full. General unsecured claimants would get between 12% and 15% of the $40 million to $50 million they are owed. Mercedes' Space Coast Truss, Inc., which is in debt for $567,000, would be sold and the proceeds given to its lienholders.