Gloucester Engineering Co. is now officially under Chapter 11 protection from creditors. The U.S. Bankruptcy Court in Boston agreed June 25 to convert the case from a Chapter 7 involuntary liquidation to a voluntary reorganization.
In a typical Chapter 11 case, that would clear the way for Gloucester to finalize its debtor-in-possession financing, and then file a reorganization plan.
But Gloucester's journey to this point has been anything but typical.
The next step should happen at a court hearing, scheduled for July 21, when the court can confirm the company's debtor-in-possession financing.
Some of Gloucester's creditors, however, have already filed a limited objection to the plan. And the process could be complicated by a proposal from competitor Davis-Standard LLC, which on June 29 filed a motion informing the court and creditors of its interest in buying Gloucester's assets.
In a June 30 telephone interview, Davis-Standard President Charles Buckley said he wanted a fair opportunity to do due diligence and consider making a bid for Gloucester.
“All we want is a fair, open process. That's in the best interest of the creditors,” Buckley said. He said he needs to know more about who is left at Gloucester to determine if the business is still viable.
“The real question is, what's left? Is there just a carcass left?” he asked. “We wouldn't buy it to shut it down. If we buy it, it's because we think it has long-term viability.”
A key consideration will be Gloucester's remaining workforce — a total of 70 people, including 55 in the headquarters plant in Gloucester, Mass., according to court documents.
“We just don't know how much talent they have left,” Buckley said.
He added that if Davis-Standard makes a bid, Gloucester's unsecured creditors could benefit. Buckley said some of Gloucester's creditors — many of them suppliers to the machine sector — are also regular suppliers to Davis-Standard.
“We would be absolutely certain that there would be something for the unsecured creditors. I can't say how much because I don't know how things stand with the business,” Buckley said.
On June 29, several Gloucester creditors filed a motion expressing limited opposition to the company's financing plan.
“Notwithstanding the breadth of authorization sought, a dearth of information exists to evaluate [Gloucester's] requested relief,” the motion states.
“[Gloucester] has not shown, other than through conclusory statements, that there is no alternative to the relief requested or that no prejudice would result to the creditors,” the motion states. “Until such time as schedules have been filed and a committee has been permitted to examine, this court should delay the entry of any orders which will have the de facto effect of a final order.”
The motion from Pawcatuck, Conn.-based Davis-Standard revealed a bit of news that has previously been unreported — that Davis-Standard has been interested in Gloucester for at least five months.
“On several occasions since January 2010, Davis-Standard informed [Gloucester] of its interest in proceeding with such an acquisition, most recently having done so in early June following the commencement of the involuntary bankruptcy proceeding.
“Since that inquiry, however, Davis-Standard has received no response from [Gloucester] with respect to its interest in pursuing a transaction or any due diligence process that an acquisition would entail.”
According to Gloucester, however, Davis-Standard refused to sign a confidentiality agreement and refused to participate in the company's process to raise capital or find a buyer.
Davis-Standard is asking the court to allow Gloucester to receive credit on an as-needed basis. The creditors have petitioned the court to delay a final order until a creditor's committee can be established “and conduct adequate expansions.”
Meanwhile, Gloucester President Carl Johnson said June 25 that he was confident the court would accept the Chapter 11 plan.
“We consulted very closely with our financial advisers, and this was a difficult decision, and we chose to do what is best for our creditors, our employees and our customers,” Johnson said in a June 25 telephone interview.
Johnson also said that Gloucester has an agreement with an affiliate of Blue Wolf Capital Fund II LP to provide $6 million in debtor-in-possession financing, which will allow the company to continue to operate during the reorganization.
Blue Wolf has been extending credit to the company since May.
Johnson said the company has continued to operate, and has been accepting new orders and paying vendors — and that will continue through the reorganization process.
“We anticipate that there will be no disruption,” Johnson said. Gloucester said in a news release that the company's order intake and production activity have accelerated since Blue Wolf began extending credit to the firm.
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