Restructuring AMERCO

How It Began

AMERCO's reorganization journey began in early 2003. Anxious bondholders were threatening to move forward with an involuntary Chapter 11 filing. The SEC had initiated an investigation. Derivative and class actions had been filed. Issues with insurance regulatory agencies and a financial restatement were looming. And the company was suffering from a cross-defaulted capital structure and a negative perception within the financial markets resulting from a lack of financial transparency.

In February 2002, PwC, AMERCO's former independent accounting firm, revised its long-standing interpretation of EITF 90-15 requiring the consolidation of AMERCO's financial statements with SAC Holding Corporations and SAC Holding II Corporation and their subsidiaries. AMERCO subsequently filed a 10-Q that did not consolidate its special purpose entities. Without PwC's mandatory imprimatur, the move resulted in an automatic warning from the NASDAQ that AMERCO's stock would face delisting.

Troubles continued into March. AMERCO filed an amended 10-Q with restated earnings and Republic Western was placed under administrative supervision by the Arizona Department of Insurance. Just months later, the company was unable to renegotiate its $400 million credit facility and forced to settle for a $205 million line requiring the company to raise an additional $150 million prior to Oct.15, 2002. After AMERCO failed to file a timely 10-K, ratings agencies placed its bonds on credit watch.

In August, AMERCO initiated an effort to place $275 million of debt to meet its obligations under a senior credit facility and to pay the $100 million principal, accrued interest and swap obligations associated with the BBATs, but was unable to raise the capital. In September, Paul Shoen, the brother of President Edward Shoen and COO Mark Shoen, filed a derivative action on behalf of AMERCO against SAC Holdings and certain directors and executives of AMERCO alleging breach of fiduciary duty, unjust enrichment, and other causes of action, and seeking to unwind the transactions resulting in SAC's ownership of certain self-storage properties.

Over the next few months and into 2003, challenges continued to mount. AMERCO failed to make a $100 million principal payment due to its Series 1997-C BBATs, placing the entire capital structure in default. Shortly thereafter, Standard & Poor's lowered the company's corporate credit ratings two notches to BB- from BB+ and the SEC began formally investigating possible U.S. securities law breaches. Following failed initial attempts to achieve an out of court restructuring failed, an ad hoc committee of bondholders threatened to file an involuntary petition against the company.

A&M Faces an Aggressive Timeline

Hired as advisers in May 2003, A&M faced an aggressive timeline of executing a restructuring plan that would provide a solution within 10 months. To restructure the balance sheet, A&M needed to devise a credible debt structure for over $1.2 billion in debt that would trade at par, with a manageable maturity schedule, maximum operational flexibility and minimum financial impairment. In addition, the team needed to alter the expectations of key creditor groups from an “all cash” payout to a partial participation at all levels and then deliver a plan that did not dilute the present equity holders.

On June 20, 2003, AMERCO filed for Chapter 11 in the United States Bankruptcy Court for the District of Nevada, and A&M began aggressively charting a solid course for reorganization. The team initiated a detailed analysis of the company's complex financial picture to unravel the confusing financial statements and gain an in-depth understating of the prospects for AMERCO's businesses.

The assessment began by studying various critical aspects of the situation, including: cash position, the company's relationship with key creditor constituents and client's businesses and respective needs. The team established open, clear and responsive communication with all constituents and developed likely restructuring scenarios, including out-of-court and various in-court strategies. Close coordination with professionals was established to ensure appropriate focus on key issues and achieve synchronicity on efforts to clearly articulate the company's strengths and negotiate with stakeholders.

Once a strong foundation of pertinent facts had been established, the team began developing and executing a credible restructuring strategy that centered on a consensual plan reinforced by the threat of cram down. Several key aspects of the tactical execution included:

• Development of a defensible set of financial projections that demonstrated the financial strength of the core business, including a clear bridge to public filings;
• Performing clear, timely analysis and communication on various issues, including: Rep West position, inter-company claims, and cash position;
• Development of a deleveraging plan, including the issuance of $200 million SAC bond;
• Assessment of capital markets and appropriate pricing and levels of leverage;
• Articulating the value of the core business and SAC; and
• Facilitation of Term Loan B syndication.

A&M's focus on the refinancing, along with taking the lead role in discussions with disenchanted stakeholders, allowed AMERCO's management to focus on financial reporting requirements and operational profitability. The team was able to successfully articulate the value of SAC, and explain its relationship with AMERCO to constituents. Prior to A&M's involvement, the relationship between SAC and AMERCO was unclear to the capital markets, and a source of litigation. Ultimately, the ability to articulate the value of the SAC entity and explain the relationship between SAC and AMERCO facilitated the issuance of $200 million of debt from SAC. This effected a de-leveraging of the company, ultimately allowing them to emerge from bankruptcy without dilution of equity, and with a feasible capital structure.

On March 15, 2004, AMERCO emerged from Chapter 11, following one of the most successful restructurings in recent history. The entire bankruptcy process took less than 9 months. A consensual plan involving $1.2 billion in debt had been reached with no dilution of equity — virtually unheard of in the world of restructuring.

How They Did It

AMERCO's capital structure restructuring involved 100% payout to existing creditors (in cash and securities) and zero dilution to preferred and common stock holders. The plan also provided for the raising of $630 million of new financing ($550 million revolver and term loan A bank facility syndicated by Wells Fargo Foothill and $80 million of second lien notes), the issuance of $269 million of new publicly traded notes to existing creditors ($120 million of second lien notes, $149 million of unsecured bonds new debt securities to existing creditors), and for AMERCO to monetize and eventually de-consolidate its investments in the off-balance sheet special purpose entity. The weighted average cost of debt was lower than when the company entered bankruptcy.

At the end of the process, the company's balance sheet and operations had been improved dramatically. AMERCO's equity value had increased by an astonishing $400 million and all creditors were paid — an impressive result that surpassed even the highest expectations.

When AMERCO, the parent company of U-Haul International, emerged from bankruptcy protection in March 2004, it secured an unusual place in history — exiting Chapter 11 with a global capital restructuring that resulted in zero dilution in shareholder value. Alvarez & Marsal, which was retained as the company's financial advisors, executed one of the most successful restructurings on record by developing and implementing a complex and consensual plan that required significant negotiations with a diverse group of debt and equity holders. By the end of the swift process, AMERCO's common equity value had increased by over 350% and nearly $300 million in value was restored to the investments of preferred stock and unsecured debt holders.

Best known for the market position and brand recognition of its subsidiary U-Haul, the dominant player in the self-move and self-storage market, AMERCO is also the holding company of AMERCO Real Estate Company, which owns 90% of the company's real estate assets, Oxford Life Insurance Company, which specializes in providing consumer-oriented life, annuity, disability income and health insurance products, and Republic Western Insurance Company, a property and casualty insurance company.

In addition to its operating subsidiaries, AMERCO utilized a special purpose entity (SAC) as a vehicle to finance a portion of its expansion into the self-storage industry. Under this arrangement, self-storage properties are owned by SAC and managed by U-Haul for a fee. SAC financed the purchase of the self-storage properties through combination of senior loans from third-party lenders and borrowing from AMERCO.

How It Began

AMERCO's reorganization journey began in early 2003. Anxious bondholders were threatening to move forward with an involuntary Chapter 11 filing. The SEC had initiated an investigation. Derivative and class actions had been filed. Issues with insurance regulatory agencies and a financial restatement were looming. And the company was suffering from a cross-defaulted capital structure and a negative perception within the financial markets resulting from a lack of financial transparency.

In February 2002, PwC, AMERCO's former independent accounting firm, revised its long-standing interpretation of EITF 90-15 requiring the consolidation of AMERCO's financial statements with SAC Holding Corporations and SAC Holding II Corporation and their subsidiaries. AMERCO subsequently filed a 10-Q that did not consolidate its special purpose entities. Without PwC's mandatory imprimatur, the move resulted in an automatic warning from the NASDAQ that AMERCO's stock would face delisting.

Troubles continued into March. AMERCO filed an amended 10-Q with restated earnings and Republic Western was placed under administrative supervision by the Arizona Department of Insurance. Just months later, the company was unable to renegotiate its $400 million credit facility and forced to settle for a $205 million line requiring the company to raise an additional $150 million prior to Oct.15, 2002. After AMERCO failed to file a timely 10-K, ratings agencies placed its bonds on credit watch.

In August, AMERCO initiated an effort to place $275 million of debt to meet its obligations under a senior credit facility and to pay the $100 million principal, accrued interest and swap obligations associated with the BBATs, but was unable to raise the capital. In September, Paul Shoen, the brother of President Edward Shoen and COO Mark Shoen, filed a derivative action on behalf of AMERCO against SAC Holdings and certain directors and executives of AMERCO alleging breach of fiduciary duty, unjust enrichment, and other causes of action, and seeking to unwind the transactions resulting in SAC's ownership of certain self-storage properties.

Over the next few months and into 2003, challenges continued to mount. AMERCO failed to make a $100 million principal payment due to its Series 1997-C BBATs, placing the entire capital structure in default. Shortly thereafter, Standard & Poor's lowered the company's corporate credit ratings two notches to BB- from BB+ and the SEC began formally investigating possible U.S. securities law breaches. Following failed initial attempts to achieve an out of court restructuring failed, an ad hoc committee of bondholders threatened to file an involuntary petition against the company.

A&M Faces an Aggressive Timeline

Hired as advisers in May 2003, A&M faced an aggressive timeline of executing a restructuring plan that would provide a solution within 10 months. To restructure the balance sheet, A&M needed to devise a credible debt structure for over $1.2 billion in debt that would trade at par, with a manageable maturity schedule, maximum operational flexibility and minimum financial impairment. In addition, the team needed to alter the expectations of key creditor groups from an “all cash” payout to a partial participation at all levels and then deliver a plan that did not dilute the present equity holders.

On June 20, 2003, AMERCO filed for Chapter 11 in the United States Bankruptcy Court for the District of Nevada, and A&M began aggressively charting a solid course for reorganization. The team initiated a detailed analysis of the company's complex financial picture to unravel the confusing financial statements and gain an in-depth understating of the prospects for AMERCO's businesses.

The assessment began by studying various critical aspects of the situation, including: cash position, the company's relationship with key creditor constituents and client's businesses and respective needs. The team established open, clear and responsive communication with all constituents and developed likely restructuring scenarios, including out-of-court and various in-court strategies. Close coordination with professionals was established to ensure appropriate focus on key issues and achieve synchronicity on efforts to clearly articulate the company's strengths and negotiate with stakeholders.

Once a strong foundation of pertinent facts had been established, the team began developing and executing a credible restructuring strategy that centered on a consensual plan reinforced by the threat of cram down. Several key aspects of the tactical execution included:

• Development of a defensible set of financial projections that demonstrated the financial strength of the core business, including a clear bridge to public filings;
• Performing clear, timely analysis and communication on various issues, including: Rep West position, inter-company claims, and cash position;
• Development of a deleveraging plan, including the issuance of $200 million SAC bond;
• Assessment of capital markets and appropriate pricing and levels of leverage;
• Articulating the value of the core business and SAC; and
• Facilitation of Term Loan B syndication.

A&M's focus on the refinancing, along with taking the lead role in discussions with disenchanted stakeholders, allowed AMERCO's management to focus on financial reporting requirements and operational profitability. The team was able to successfully articulate the value of SAC, and explain its relationship with AMERCO to constituents. Prior to A&M's involvement, the relationship between SAC and AMERCO was unclear to the capital markets, and a source of litigation. Ultimately, the ability to articulate the value of the SAC entity and explain the relationship between SAC and AMERCO facilitated the issuance of $200 million of debt from SAC. This effected a de-leveraging of the company, ultimately allowing them to emerge from bankruptcy without dilution of equity, and with a feasible capital structure.

On March 15, 2004, AMERCO emerged from Chapter 11, following one of the most successful restructurings in recent history. The entire bankruptcy process took less than 9 months. A consensual plan involving $1.2 billion in debt had been reached with no dilution of equity — virtually unheard of in the world of restructuring.

How They Did It

AMERCO's capital structure restructuring involved 100% payout to existing creditors (in cash and securities) and zero dilution to preferred and common stock holders. The plan also provided for the raising of $630 million of new financing ($550 million revolver and term loan A bank facility syndicated by Wells Fargo Foothill and $80 million of second lien notes), the issuance of $269 million of new publicly traded notes to existing creditors ($120 million of second lien notes, $149 million of unsecured bonds new debt securities to existing creditors), and for AMERCO to monetize and eventually de-consolidate its investments in the off-balance sheet special purpose entity. The weighted average cost of debt was lower than when the company entered bankruptcy.

At the end of the process, the company's balance sheet and operations had been improved dramatically. AMERCO's equity value had increased by an astonishing $400 million and all creditors were paid — an impressive result that surpassed even the highest expectations.