BY ROBERT P. MADER
Of CONTRACTOR’s staff
HOUSTON — Encompass Services Corp. has filed a voluntary petition for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of Texas. The company was unsuccessful in its attempt to create a pre-packaged Chapter 11 (November 2002, pg. 1).
According to Bankruptcy Creditors Service, Trenton, N.J., publishers of the Web site bankrupt.com, excluding its unsecured trade obligations, Encompass “has obligations in the approximate amount of $1.2 billion. That indebtedness includes secured credit facility obligations in the approximate amount of $589 million, unsecured bonds and note obligations in the face amount of $339 million, and accrued and unpaid mandatorily redeemable convertible preferred stock dividends in the approximate amount of $309 million,” the reporting service said. Encompass also has “significant trade obligations.”
In its bankruptcy filing, Encompass listed total assets of $1.23 billion and total debts of $1.76 billion.
The largest debts listed in the filing are owed to its sureties, with Northwestern Mutual Life Insurance Co. owed the most, nearly $38 million. The company also owes trade debt to wholesalers such as Ferguson Enterprises and Hughes Supply, and manufacturers including Carrier Corp., The Trane Co., Johnson Controls, Janitrol/Goodman and Siemens Building Technologies.
Under the proposed pre-packaged bankruptcy, the company’s senior secured lenders would have restructured a portion of their loans into a new $200 million term loan and exchange the remaining amount for 80% of new common stock. The company’s 1012% senior subordinated notes due 2009 would have been exchanged for 20% of new common stock. And the company’s junior subordinated notes, mandatorily redeemable convertible preferred stock, common stock, and all outstanding options and warrants would have been cancelled and become worthless.
Bankrupt.com reported that creditors were not convinced that they could get enough money from a reorganized Encompass. Houlihan Lokey Howard & Zukin, Encompass’ financial adviser, estimated under the proposed plan that Encompass would have a “total enterprise value” on a post-restructuring basis is in a range of $600 million to $650 million. Then Houlihan Lokey estimated an “equity value” of $425 million, bankrupt.com said.
Based on that valuation, the creditors service reported, senior lenders would get 90.3% of their money and senior noteholders would get 24.3%. None of them liked that and proposed alternative restructuring plans. Encompass then filed voluntary Chapter 11 to force its creditors to accept a reorganization plan.
The bankruptcy court scheduled a series of hearings beginning in December and conducted throughout this winter on both contested and uncontested motions by creditors. One of the contested motions, scheduled to be heard on Jan. 29, 2003, was entitled, “Expedited Motion to Sell Certain Assets of Encompass Mechanical Services Southeast, Inc. (F/K/A/ Ivey Mechanical, Inc.) Free and Clear of Liens, Claims, Encumbrances and Other Interests Subject to Higher and Better Offers.”
Joseph M. Ivey, president of the former Ivey Mechanical in Kosciusko, Miss., was one of the founders of Group Maintenance America Corp., which merged with Building One Services to become Encompass. Ivey, the president and chief executive officer of Encompass, was forced out in December.
On Dec. 23, 2002, Encompass announced that Ivey had resigned “to pursue other interests.” Hank Holland, chief operating officer, assumed additional operational responsibilities as interim president.
“On behalf of the board of directors, I would like to thank Joe for the dedication and commitment that he has shown to Encompass,” said Michael Gries, chairman and chief restructuring officer, in the announcement. “Joe provided his leadership at a very critical time for this company, and we sincerely appreciate all of his efforts.”
Gries had been brought on in the beginning of October as chief restructuring officer, then replaced Patrick Millinor as chairman, although he stayed on as a director.
Encompass said that, during the Chapter 11 process, it expects operations to continue as normal and customer work to proceed as scheduled. As part of its first-day motions, the company said it expects to receive court orders authorizing ongoing payment of its employee wages and benefits, payment of its vendors for goods and services provided under normal credit terms, as well as other customary first-day orders.
The company planned to pay “critical vendors.” Critical vendors were defined as vendors that could lien projects or stop or delay ongoing projects, thereby hurting Encompass’ cash flow.
The company said in a Securities and Exchange Commission filing that it “anticipates that, in the 18 to 24 months following the date hereof, it will sell certain of its non-core or under-performing assets.”
The company said it doesn’t know what those subsidiaries are yet, but nevertheless said it hopes to get $50 million net proceeds for the sales.
In its SEC filing, the company’s financial projections estimate that it will sell operations with 2002 revenues of $891 million. The firm reported total revenues for 2001 of $2.878 billion, with mechanical revenues of $1.748 billion (CONTRACTOR Book of Giants, May 2002, pg. 19), or about 60% of total revenues. The filing prognosticates that total revenues for 2003 will fall to $1.977 billion. If mechanical revenues fall in the same proportion to total revenues, the firm will bill about $1.2 billion in mechanical revenues.