Dear Clients and Friends of Kerlin, November 1, 2011

Without a doubt, the capital markets environment during 2011 has been highly unusual, marked by extremes and contradictions, great uncertainty and much volatility. For example, on the one hand, credit is plentiful — banks and insurance companies are willing to lend at record-low rates to companies that do not need the money. On the other hand, these same lenders are unwilling to extend credit to unseasoned companies. The public equity markets, with a few exceptions, have been generally cruel to companies needing to issue new equity, and the IPO market has effectively disappeared. Finally, private equity funds flush with cash are ready to make new investments, but have had difficulty closing deals due to valuation or financing reasons.

Despite these headwinds, we still see opportunity for our clients. There is a strong market for great companies to be sold to strategic buyers or recapitalized with private equity, and fundamentally sound companies can refinance debt at lower interest rates with looser covenants. Also, select distressed situations are giving strategic buyers the opportunity to make add-on acquisitions on very favorable terms. These types of situations, however, do not materialize on their own — they need to be created.

Like the unusual nature of this year, I would like to discuss three interesting projects we worked on that are somewhat outside of the typical Kerlin assignment. All of them, I believe, are illustrative of creative investment banking thinking and resourcefulness.

Having emerged from bankruptcy, Hostess Brands was looking to divest Mrs. Cubbison‘s stuffing, a West Coast brand and a non-core operation, in order to further reduce its debt. Kerlin developed this strategic opportunity for its client, Sugar Foods, which was looking to expand its presence in different areas of the supermarket, and helped pre-empt an expected auction process. Within a very tight timeframe, Kerlin helped the Sugar Foods team negotiate a comprehensive transaction which included multiple co-packing agreements. These agreements were critical for an orderly transition and needed to be completed in time for the 2011 holiday season.

The next situation evolved more slowly, morphing from a simple strategic options review into a much more complex and hands-on assignment. Kerlin was retained by a family trust to review an underperforming asset: a $45 million note secured by the operations and land lease for a regional FBO. Though this business had suffered significantly during the economic downturn in concert with the rest of the private aviation market, it retained solid fundamentals and a reasonable prospect for recovery. Kerlin developed a strategy for recovery and then assisted with the negotiation of a series of forbearance agreements. Kerlin also helped the note holder evaluate the underlying collateral, the solvency of the debtor, and ultimately renegotiate the note with enhanced collateral as well as significant personal guarantees which should measurably increase the trust‘s prospect for recovery.

The final situation involved a long-time Kerlin client that had acquired an outstanding $47 million subordinated note with a fixed 8% interest rate. Wishing to take advantage of lower interest rates and because the company‘s credit had improved materially, the client expected to call the notes and refinance with new senior debt. The note holders, however, did not wish to be called since it would require them to pay capital gains on the original sale. Kerlin evaluated all of the options and developed one that proved to be a win-win for all the parties. The solution centered on developing a process whereby Kerlin approached the note holders and negotiated a new interest rate of 5.75%. With everyone in agreement, the new financing preserved the subordinated debt in the capital structure, reduced interest expense by 29% and gave the note holders the ability to defer the capital gains taxes.

While we of course remain focused on our traditional M&A and restructuring work for both private and public companies, these three examples demonstrate how we have helped create market-driven opportunities for our clients regardless of the market environment around us.

Finally, I have one more piece of news to share with you. Drew H. Webb has rejoined Kerlin as a Senior Advisor after spending three years as Chief Operating Officer of Farmer Bros. Drew spent ten years with Kerlin before going to Farmer Bros. and we are delighted to have him back. Drew was formerly an executive for ConAgra‘s largest division responsible for M&A and corporate development, and he also previously served as an executive of Basic American Foods. Drew‘s skills and unique experience will be invaluable to our clients especially in the M&A integration planning area. Our senior bankers, together with Drew, bring in-depth strategic advice to our clients as part of the deal process.

I look forward to speaking with you soon.

Sincerely,

William K. Doyle
Managing Partner