After agreeing to several loan amendments and three forbearances, lender GE Capital Corp., represented by Paul, Hastings, Janofsky & Walker partner Jesse H. Austin III, appears poised to collect on the approximately $108 million—and possibly more—it is owed by the nation's largest privately held envelope company.

That's because NEC Holdings Corp., a Uniondale, N.Y.-based envelope manufacturer with operations in Austell and other parts of the country, on June 10 filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the District of Delaware.

Bankruptcy documents indicate the filing comes after a truncated move to sell the company, which pushed it into default with its lender in mid-May.

But it doesn't look as if NEC, the holding company for envelope manufacturer National Envelope Corp., will stay in Chapter 11 long. Austin said the primary goal behind the bankruptcy filing was to position the company to sell itself via a 363 sale within the bankruptcy. A 363 sale allows purchasers to acquire NEC's assets, but—unlike in a sale outside bankruptcy—gives lenders the potential to leave behind certain liabilities such as environmental liabilities. The filing also opened the way for NEC to receive a quick shot of debtor-in-possession funding—enough to keep the company operating until it can be purchased by private equity investor The Gores Group, with which it has a June 4 letter of intent, before the end of August.

NEC has received a judicial nod for that funding; the court approved a $138.9 million senior secured, super priority DIP facility from pre-petition lender GE Capital on Friday. The agreement, Austin said, essentially serves as a refinancing—known as a roll-up—of NEC's existing, defaulted debt, which has three components: a revolving credit loan with $70 million outstanding, through which NEC can borrow an additional $10 million; a $38 million Term A loan and a $35 million Term B loan, also known as a "last out" loan, meaning all of the proceeds to the GE Capital lenders must be paid in full before any Term B loan holders get their recovery.

A DIP agreement attached as an exhibit in one of the court files lays out a series of milestones NEC must meet, including: execute a definitive asset purchase agreement for a 363 sale before July 2; hold an auction by Aug. 23; and close on the sale, once it is authorized by the court, by Aug. 31.

Austin worked on the case with Paul, Hastings associate Cassie Coppage. NEC's bankruptcy counsel are from Young Conaway Stargatt & Taylor in Wilmington, Del., and Latham & Watkins in Chicago. Fulbright & Jaworski serves as special counsel.

The company, which was founded in 1952 by Holocaust death camp survivor and Polish immigrant William Ungar, filed for Chapter 11 protection for 28 entities around the country, including its Georgia affiliate, National Envelope-South. It still is a family-owned business, and according to court documents, began growing via strategic acquisitions in 1991.

The company employs more than 3,300 workers, produces an estimated 37 billion envelopes per year and holds a 21 percent share of the $3.7 billion North American envelope market.

But, as CFO James Shelby Marlow noted in his declaration, over the past three years the company has been hard hit by "the global recession and the displacement of traditional print communications and media by electronic formats."

Consolidated net sales have fallen from $866.8 million in 2007 to $676.2 million in 2009. The company has posted net losses every year since 2007, although it has stemmed that deficit somewhat thanks to layoffs, facility sales and other restructuring efforts.

In addition to secured creditor GE Capital, the company also owes about $89 million to unsecured trade creditors, according to court filings, including $43 million to International Paper Co. in Memphis, $2.7 million to Neenah Paper Inc. in Alpharetta and more than $500,000 to printing and imaging company Pitman Co. in Kennesaw.

Austin said the lenders were patient with NEC in part because the company has had a long relationship with GE Capital, which "tries to work with its borrowers as much as possible, and if you're the senior lender and have last-out dollars behind you, you have some level of comfort."

He also pointed out that NEC's story was compelling: Ungar, the company's founder, "came to the United States with effectively nothing and built this business. He is still alive, he's still chairman of the board, he's 91 or 92. The other board members are his four daughters. There's a good history there; it is not something you go out and immediately abandon because it runs into some problems. Unfortunately, we're not using envelopes like we used to."

The case is NEC Holdings Corp., No. 10-11890.

Mark I. Duedall compares distressed asset deals to "a warehouse full of bananas."

That's a reference to how quickly the value of a financially troubled company can spoil as key employees leave, business declines and suppliers demand cash as the company attempts to get its affairs together, regardless if it is in bankruptcy protection.

Duedall and two other lawyers at Hunton & Williams, Amy Alcoke Quackenboss and David M. Fass, have been dealing with a lot of banana-filled warehouses lately. They most recently represented CIT Group/Business Credit Inc., a secured lender, on the sale of two bankrupt companies completed under Section 363 of the U.S. Bankruptcy Code.

Operating under the warehouse-of-bananas philosophy, both deals closed quickly—within about three months of the companies' Chapter 11 filings.

According to the bankruptcy documents, when Springdale, Ark.-based National Home Centers, a supplier of construction materials, filed for Chapter 11 protection in U.S. Bankruptcy Court for the Western District of Arkansas in December, it owed about $4 million to CIT and about $11 million to another secured creditor. When Pelham, Ala.-based Moore-Handley Inc., a building and hardware materials distributor, filed in U.S. Bankruptcy Court for the Northern District of Alabama in July, it owed CIT about $17.5 million.

As Quackenboss put it, the lawyers' role when representing secured lenders in situations like this is to "hope and pray that we get our money out."

For the most part, they did. National Home Centers sold in April to a competitor, Raleigh, N.C.-based Stock Building Supply, for about $15 million. Duedall said that all secured lenders in this action were paid in full, with money left over for the unsecured creditors. Moore-Handley sold in October, also to a competitor, Knoxville, Tenn.-based House Hasson Hardware, for $14.5 million. In this sale, Duedall said, CIT got all of the proceeds less a small amount for employee severance payments and post-closing wind-down costs.

"Whenever you're in a distressed transaction, what every party needs to understand is the secured lender wants to understand the exit … and what is the credible path to get there," Duedall said.

If those questions aren't answered quickly, a secured creditor will move to get its collateral back—through, for example, a 363 sale, which is the sale of an asset in bankruptcy. "The goal is to keep the company alive long enough to maximize your value," said Quackenboss. "As a secured lender, you can't just use a Chapter 11 to sell your assets. There has to be some payment to the estate … to the unsecured creditors, the administrative creditors—the sale cannot just benefit the secured lender."

Lawyers for the secured lender, she said, have to get consensus with counsel for the unsecured creditors, the unsecured creditors' committee and the debtors.

In both the National Home Centers and Moore-Handley bankruptcies, Duedall said, his team realized that the best way to get buy-in from the unsecured creditors committees—largely made up of vendors to the building and hardware supply companies—was to work to keep the debtors up and running so they could continue to buy from these vendors, rather than pushing for liquidation.

In the National Home Centers case, Quackenboss said, the secured lender had to battle with unsecured lenders who thought the business was worth more than the $15 million that stalking horse bidder Stock Building Supply was offering. Then, a second bidder came on the scene and wanted to delay the auction process by six weeks to complete due diligence.

"We had to get with the creditors committee, we had to get with the debtor to form a consensus over what to do," Duedall said. Ultimately, the parties decided to move forward without the late-coming bidder because, he said, so much money was going out the door on professional fees and other expenses that waiting—even for a potentially higher bid—would have been too costly.

In Moore-Handley, Duedall said, a competitor at first wanted to buy the company for just $10.5 million. Another buyer, House Hasson, came to the table two weeks prior to the auction and offered to pay more. But, unlike the first buyer, Duedall said, House Hasson planned to lay off several hundred warehouse employees.

As counsel to the secured lender, he said, the Hunton lawyers told the late-coming bidder that its plan would pass severance costs on to the bankruptcy estate of several hundred thousand dollars—something that was unacceptable unless the sales price was higher. House Hasson eventually agreed that its bids would always be $600,000 to $700,000 higher than those of other bidders at every stage of the auction, Duedall said, and eventually House Hasson placed the winning bid—which was some $4 million higher than the original bidder's offer.

National Home Centers was represented by attorneys from Wright, Lindsey & Jennings in Little Rock, Ark. Its buyer, Stock Building Supply, was represented by Skadden, Arps, Slate, Meagher & Flom attorneys. Moore-Handley was represented by attorneys from Bradley Arant Boult Cummings in Birmingham, Ala.; its buyer, House Hasson, was represented by lawyers from Maynard Cooper & Gale in Birmingham.