Turning Point

RER: First let's take a look at the evolution of Phoenix and Boston Partners. How did this organization come together?

Suliman: Prior to NationsRent's Chapter 11 filing, it was obvious that the company would be unable to service its debt but that it had valuable assets, a good brand, strong market position and a unique opportunity in its NationsRent at Lowe's joint venture. Bryan and I teamed up with two Boston-based institutional investors, Regiment Capital Advisors and The Baupost Group, that had been tracking the bank debt and following the situation for a while without acting. Phoenix worked to educate Regiment and Baupost on the industry economics and the company's position and prospects. As the price of the company's bank debt dropped, our investor group began to build a position. As the size of our position grew, we recognized that the bank group seriously needed to formulate a plan of reorganization and assemble a management team that would be capable of executing a strategic plan based upon a return to basics.

Around the same time we were building our bank debt position, the unsecured creditors committee recruited Jeff Putman to advise them on such matters as company valuation and the strategic significance of the Lowe's relationship. Following completion of his work for the committee, Bryan approached Jeff with a proposition to become CEO of NationsRent if Phoenix and its partners were successful in convincing the bank group to follow its reorganization plan.

How did the deal with NationsRent come together?

Suliman: By the fourth quarter of 2002, we had acquired a sufficient amount of NationsRent bank debt to influence the outcome of any plan of reorganization. We met with the bank group's steering committee and then the broader bank group to generate a consensus around a new management team to be led by Jeff and a return-to-basics strategic vision for the company. The company's management and board were aware of the size of our bank debt position and the growing consensus among the bank group and agreed to meet with us to hear about our plan. It was a very productive meeting that led to the board's agreement to file a consensual plan of reorganization in December of last year.

This was a turning point in the bankruptcy process because everyone involved now had the same objective — emerge from bankruptcy quickly with the most conservatively structured balance sheet in the industry. Among all bank debt holders who voted, 100 percent voted in favor of the plan, which was essentially to convert the pre-petition bank debt into equity and replace senior management and the board with an industry-experienced team. The final step was to arrange exit financing and complete negotiations for restructuring the company's substantial pre-petition operating lease obligations.

From a financial standpoint, what are some of the issues NationsRent must overcome?

Suliman: Competitors gained market share on us during the past 18 months by convincing customers that bankruptcy would impair our ability to operate. Industry rumors of impending liquidation scared off some of our best salesmen, and good customers followed them because they appreciate the relationship nature of our business. To a certain degree and at various times there was an element of truth to these rumors.

If, however, you apply that same logic today, NationsRent has the opportunity to make significant strides going forward as these same competitors are now constrained by the burden of over-leveraged balance sheets. We're sitting here today with not a single dollar drawn under our new $150 million credit facility and more than $100 million of commitments from vendors for new equipment financing. We'll use this capital to rebuild market share when and where it is profitable to do so. The greatest challenge facing us from a financial point of view is getting the word out to our customers and smaller local vendors that the new NationsRent is the most financially stable operator among the national rental companies.

How will you make your payments with such enormous debts?

Suliman: NationsRent emerged from bankruptcy on June 13th and became a profitable company on June 14th. In fact, we were very profitable on the 14th, which is a Saturday — one of our busiest days at the NationsRent at Lowe's locations! It is simply not a correct statement to say that our company's debts are enormous. On the day NationsRent came out of bankruptcy, the senior debt on our balance sheet was just a hair over $100 million, compared to over $1 billion 18 months ago. That debt on our balance sheet today resulted from re-structured operating leases and equipment debt, all of which is scheduled to be fully repaid in less than three years from internally generated cash.

Can you give us some insight into the process of going through Chapter 11 bankruptcy and what the company had to do to get out of bankruptcy, i.e., assurances to creditors, structural changes, and assurances to capital sources?

Rich: First, regarding assurances to creditors, NationsRent owns approximately $1 billion dollars of rental equipment, valued at first cost, and an infrastructure of more than 250 locations capable of servicing double this amount of fleet. Our lenders during bankruptcy were quite comfortable lending on a short-term basis against these assets. It was a slightly different story for the lenders who provided new credit facilities to support the company's exit from bankruptcy. This new group of lenders needed to look out four or five years and believe in both our industry and our management's ability to perform.

There has been a significant structural change in how the credit markets now view the construction equipment industry. During the consolidation phase and for a few years thereafter, lenders looked at our industry primarily as cash flow borrowers. As a result, every company that grew through acquisitions became over-leveraged in the eyes of traditional asset-based lenders. NationsRent's new loan facility is based upon very conservative advance rates against current auction values of our equipment. We're comfortable with how the market is extending credit today, because we are taking a conservative approach to the use of debt. But if you apply these same credit standards across our entire industry, you'll understand why so many companies will be required to take dramatic steps to de-leverage their balance sheets.

As for our capital sources, we have great capital partners. First, they are good businessmen who took the time to truly understand the fundamentals of our business from the bottom up. Secondly, they have patient money. As long as NationsRent continues to generate an acceptable return on our assets, we will have plenty of equity capital to grow our business. And last, but by no means least, our capital partners believe in this management team and the commitment of the 3,300 employees who stayed with us through the bankruptcy.

Please explain how NationsRent's debt has been restructured.

Suliman: There were three categories of obligations that had to be restructured for NationsRent to emerge from bankruptcy: operating leases, unsecured debt and secured bank debt.

Forty percent of the company's rental fleet was financed through off-balance sheet leasing arrangements. On its own, NationsRent was unable to negotiate settlements with the vast majority of these lessors. So as part of our plan of reorganization, we formed Boston Rental Partners and received court approval to assist the company by providing capital through Boston Rental Partners to either purchase the lessor's equipment at current market values, or reject their leases and replace it with newly acquired equipment. We did about an equal amount of both.

The pleasant surprise in this process is that the majority of the lessor's looked through the bankruptcy process and believed we would be successful in re-capitalizing the company with an extremely low level of debt, so they exchanged their leases for secured equipment loans at fair market values of the underlying equipment. The sum of these obligations total about $100 million and represent today the only debt on our balance sheet other than some convertible subordinated debt that is owned by the pre-petition lenders who are now the new shareholders.

Secondly, the company's $275 million of unsecured debt, along with all of the remaining unsecured obligations such as trade payables, were satisfied by forming the Unsecured Creditors Trust, which received 5 percent of the securities that were to be distributed to the holders of secured bank debt. In addition, the Trust received about $1 million in cash and various other rights.

The third category of debt was $750 million of pre-petition, secured bank debt. This debt was restructured by exchanging a combination of convertible subordinated debt, preferred stock and common stock at an aggregate exchange rate of 21 cents worth of new securities for each dollar of pre-petition bank debt.

How has the company been restructured on a practical level? Has the company's management and organizational chart been completely rearranged?

Rich: There have been two fundamental changes in the organization structure. First, we've flattened the organization to four layers: store manager; district manager; regional vice president and CEO. We believe this will enable a better flow of communication in both directions…to and from the customer. Second, we've divided the three existing regions into six smaller and more manageable regions, each with an operating vice president. Our strategy is to run a multi-regional company that presents a customized set of services to each regional customer group. Having said that, we fully intend to capture the economies of scale that come with the overall volume of business on a national basis.

Bryan and Jeff are both known in the rental industry as having considerable experience in a hands-on manner in terms of running a rental company. How will you bring that experience to bear with NationsRent, which has a very different set of problems than Logan Rents or American Equipment did in the past?

Putman: We would agree with the observation on experience. However, it seems to us that the same set of principles that guided us throughout our careers still applies. NationsRent was over-leveraged and pursuing a standardized store and rental-only model. The leverage issue has been dealt with, leaving the new NationsRent with an incredibly strong balance sheet. Our strategy focuses on serving the customer's needs at the local level by adapting our service package to the unique needs of individual customers on a local and regional basis. We believe that this is still, after all these years, a relationship-driven industry. It is still more about people than it is about machinery or money. Our challenge is to field the best team in the industry and to listen to what customers want rather than tell customers what we do.

RER: Will there be other organization changes on the district or regional level?

Putman: There will definitely be more organization changes. They will be driven by the regional leadership teams as they get closer to the pulse of their respective markets. We are already seeing new structures develop at the store/district/region levels. If those changes drive a need for different levels or types of support in the regional or national service centers or at the company headquarters, then we will respond accordingly. The original NationsRent was a “roll-up” strategy. The new NationsRent is about winning and keeping customers.

What about on the local level? We hear feedback that there is considerable disarray in NationsRent's operations on a local level in many places?

Rich: We hear the same rumors. The good news is that the rumors don't match our first-hand experience. The NationsRent store infrastructure is in good shape and there are lots of great team members out there serving loyal customers who stayed with us during 18 months of Chapter 11. This company (not us) deserves a ton of credit for working through this situation at the local levels. We've helped by arranging the replacement of some of the older fleet prior to emergence from Chapter 11 through Boston Rental Partners. The team did a good job of protecting our Boston Rental Partners investment and helping bring NationsRent out of Chapter 11. We've already started replacing fleet. We are very comfortable that this company is still a player in the market. There's work to be done but it is all basic blocking and tackling. We have the people and the resources to do that.

What will you emphasize to get the company up and running smoothly?

Putman: Well, the company is up and running at a $500 million annual run rate now. I would not claim that everything is “smooth” but I do think that everything is working pretty well considering the restrictions placed on the company during bankruptcy. To answer your question…we will emphasize exactly the things that you would expect. We will emphasize safety. We will emphasize quality. We will emphasize integrity. We will emphasize individual responsibility and accountability. And certainly, we will emphasize customer service.

I have to refer back to an earlier question about the different challenges in this business. Our belief is that the issues that put NationsRent into Chapter 11 have largely been addressed. The remaining issues fall into two basic categories: leadership of people and management of assets. The team that we have assembled is absolutely capable of addressing both of those issues

What are your plans in relation to Lowe's?

Putman: By the end of 2003, we will have 100 NationsRent stores co-located with Lowe's Home Improvement Centers. We think it is a great alliance. Lowe's has a great brand and their marketing and merchandising skills are un-paralleled. We feel fortunate to have had the opportunity to prove the strategic and economic viability of joining NationsRent rental centers with Lowe's. Now that the concept is proven, we hope to accelerate the deployment of the NationsRent at Lowe's concept. We think it is a real winner.

Did you have to sell creditors or the bankruptcy court on the abilities of the new management team, or was it more a question of demonstrating new capital sources and an effective business plan?

Putman: It was all of the above. All of the constituents in this effort were interested in the viability of the capital structure and the ability of the management team to formulate and execute on a business plan. All of our partners played critical individual roles in building trust with the financial institutions and putting together the puzzle of the consensual plan of reorganization. It was a team effort. It was certainly larger than any one person. Going forward, it will still be a team effort.

One of the perceptions in the industry about NationsRent in the past was that the company was managed and staffed by people who may have had good business resumes but lacked rental experience. That's obviously not the case now with Bryan and Jeff, but how about the organization as a whole?

Rich: We agree that the lack of specific industry experience was an issue. But, there's no practical value in trying to find any person or group to blame. This roll-up was executed by a group of skilled professionals who had individually and collectively been very successful in other endeavors. They built a great brand and they acquired a great platform. Anyone could second-guess their strategies and their financial decisions. Our focus is on the future. We believe that equipment industry experience is important. To that end, we've assembled a senior management team with nearly 200 years of collective experience in this specific sector. The proof will be in the performance. If we're right about the need for leadership, prudent asset management, conservative fiscal policy, adequate liquidity, and industry-specific experience…this should be a home run.

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