Nothing Like a Good Crisis!

Hilo Hattie

August 21, 2017

Ted D. Nelson

Last Wednesday, I learned that Bob Fujioka had announced his retirement this year from his position as Vice Chairman at First Hawaiian Bank. As I pondered this revelation, a rush of memories passed through my mind. Not that Bob and I are long time friends or anything like that. It's just that he held a senior position at one of the largest banks in the state of Hawaii at the time that I accepted the assignment to reorganize a financially distressed Hawaii based retail business that was in default under the terms of a multi-bank loan agreement with his bank and two others. His bank also had other, equipment based loans outstanding with the company.

The name of the company was Hilo Hattie. I began my reorganization efforts in May of 2008 after the owner had made the decision that instead of hiring me to be his "Crisis Manager", he would sell me the company. Although the company had recorded sales of about $50 million the prior year, due to a very difficult national economy and store closures, it's then current run rate projected sales to fall to as low as $25 million. The Company had lost well over $4 million during the previous year and was behind in meeting it's daily/monthly obligations by over $6 million. I agreed to buy the company for a total purchase price of $25k. The purchase price could be increased on an earn-out basis, if certain balance sheet representations had not turned out to be false.

Once in control of the company, my first priority was to meet with the top twenty vendors/suppliers and tell them the truth regarding the weak performance and challenging financial condition of the company while informing them of the recent change in ownership. They needed to know the financial state of the company. I also informed them that we would not be able to make any payments on what we currently owed them--not what they wanted to hear. I assured them anything they shipped to us from that day forward would be paid in accordance with 30-day terms. I gave them my personal cell-phone number and asked them to call me first if any payments were late. I told them that I fully understood if they made the decision to no longer do business with us. No significant vendor choose to stop doing business with us at that time.

The next priority was to meet with and solicit support from the members of the "Three-Bank Syndicate" for our emerging plan. The Agent Bank was Central Pacific Bank (CPB). The third bank, in addition to First Hawaiian, was American Saving Bank. The meeting was held in the CPB offices on a June morning. My goal with the banks, just like with the twenty top vendors, was first to make sure they knew the truth about the current financial state of the company and then to also share with them the early progress we had made with those top vendors in the meetings we held during the previous two or three weeks.

Relatively speaking, we did not owe The Banks a large amount of money; our loan balance did not exceed $1.5 million. But given our financial condition, and the fact that the bank agreement provided that every asset of the company (including cash assets) was included in the security for the loan, The Bank Syndicate had the power to shut-down the company at a moment’s notice.

When we arrived at CPB's offices for the meeting, we were surprised, no, we were shocked to learn that First Hawaiian Bank would not be joining the meeting. Instead they had CPB pass along a very simple but power packed message, "we just want to be paid, and paid now!" Otherwise, I felt that it was a good meeting, a meeting in which we were able to articulate to those bankers in attendance the fundamentals of our plan to "right the ship". We gave them direct and honest answers to all of their questions. We may have made progress with two of the banks that day, but we had a lot of ground to cover with the absent bank, First Hawaiian.

As we left the bank meeting and were on the way back to our offices, I got a phone call from my friend and former BYU football team mate (I was surprised that he called, it was Wednesday and he regularly played golf on Wednesday's). He was the one who had introduced me to the owner of Hilo Hattie and originally was going to be my partner in my efforts to restructure the company. He wanted to know how the "bank meeting" had gone. I told him that I thought it had gone quite well, except that First Hawaiian did not show up for the meeting, but instead sent a message that they wanted to be paid. He sounded very disappointed as we ended our call.

About an hour later, I received another call from my old team mate. This time he asked, "what are you doing for lunch tomorrow?". I responded, "I'm guessing you're about to tell me. What's up?" He went on, "Would you like to have lunch with the Vice-Chairman of First Hawaiian Bank?" I hesitated for a moment, "hey, aren't you golfing today? How did you pull that off?" After a pause for effect, I heard the words, "he's in my foursome".

The next day I did indeed have a lunch meeting with the Vice Chairman of First Hawaiian Bank, one Bob Fujioka. At that meeting I met one of the great gentleman bankers that I have ever met. Bob and I met regularly thereafter, (often with very short notice) we worked together to help save a very important company, important to the history and people of Hawaii. Bob was an important factor in the efforts to save many jobs by allowing Hilo Hattie to continue as a business.

I didn't say Bob was a "soft touch", I only said he was a gentleman.

While First Hawaiian Bank's other loans to the company remained outstanding most of the time that I spent at Hilo Hattie, the loan to the three-bank syndicate got paid in a hurry. Since the Bank Syndicate had such a broad collateral agreement, I knew that getting them paid off in full very quickly was an imperative! My creative juices were flowing, but I just couldn't come up with a viable plan to pay off The Banks (until our backs were against the wall).

As we rolled into July, our financial woes were getting to be known throughout the State of Hawaii. As part of a P/R campaign arrangements were made for me to be interviewed on a Business TV Show moderated by Howard Dicus. The goal was to dispel rumors that the company was about to go out of business and etc. I did the best that I could in my conversation on air with Howard to deliver a positive message and to challenge the locals to go to Hilo Hattie Stores to stock up on their Aloha Ware. As I left the studio, I called the office to let them know my estimated time of arrival and to learn of any new "brush fires" that might need my direct attention.

I couldn't believe my ears! I was informed that Central Pacific Bank had just acted to "Freeze" all of our bank accounts. They were exercising their rights to seize the cash collateral under their agreement. This would potentially force us to close our business immediately, terminate all employees and enter into a Chapter 7 Liquidation. This approach would likely provide for the banks to get all of their $1.5 million owed to them, but many others would be hurt badly including hundreds who would no longer be able to rely on a steady paycheck.

I headed directly to the offices of Central Pacific Bank. Once there, I was allowed to meet with The Banker in Charge who was quick to defend their drastic actions and to let me know, in no uncertain terms, that that was the way it was going to be! At first I pleaded with him, explaining all of the reasons that his relatively small loan would be paid in full over time and that his actions would have collateral damage of unthinkable proportions! He was not moved...

My next approach was to explain to him that I was planning to hold a press conference in the lobby of his building in the next thirty-minutes in order to report to the world the immediate closing of all Hilo Hattie Stores. I let him know that I would spare no details as to the actions being taken by the bank group that would precipitate this unfortunate outcome. I invited him to join me.

He asked me if he could have ten-minutes and left the room.

When he returned, I was happy to learn that The Banks would consider another approach and that all of our accounts were in the process of being released. We were back in business! But he wanted to meet again the next afternoon to let me know what the "New Loan Conditions" would be as dictated by The Banks.

My motivation to come up with a plan to repay The Banks had been greatly enhanced!

As it turns out, there was a certain jewelry company that operated "Kiosks" inside each of our stores. I knew what their sales levels were and I could estimate what their operating profits might be. The numbers were substantial! The business they conducted inside our stores was very meaningful to them. As soon as I retuned to my office after the bank encounter, I reached out to the CEO of this jewelry company and asked if he could come to my office for a meeting. He responded in the affirmative and wasted no time making the short drive to our offices.

I shared with the Jewelry CEO the experience I had just had with The Banks. He understood the ramifications on his business of a poor result with our bank group and was quite attentive. I suggested to him that we needed to repay The Banks as soon as possible. He agreed. (He also well understood that sooner or later the company was likely to seek protection in bankruptcy to finish its' reorganization. And that once in bankruptcy, we would have the right to cancel the multi-year contract between our two companies and bid out the business to other potential jewelry store partners.) So, he responded quickly in the affirmative when I assured him that if his company would loan us $1.5 million immediately, I personally would promise to not cancel his contract should the company declare bankruptcy, and that we would extend their contract one additional day for each day any amount remained outstanding under the loan he was about to make to us.

The very next day, the jewelry store CEO presented me with a cashiers check for $1.5 million, drawn on First Hawaiian Bank. I tucked the check into my pocket and headed back to the bank offices for my mandatory meeting with the CPB banker who was acting in his capacity as head of the Bank Syndicate. When I entered his office, it was apparent that he was "Loaded for Bear"! There was no time for cordial greetings, he immediately began to tell me "How the Cow Ate the Cabbage"! I sat quietly in front of him as he unloaded the results of his overnight homework. He was "laying down the law"!

When he finished, I could tell he was quite proud of his own performance. I let him settle back into his chair for a few moments before I let him know that what he had just proposed was unacceptable. His outrage at my response was just beginning to boil over when I pulled the seven-figure check out of my pocket and slid it across his desk. It took him a few long seconds to digest what had just happened; his troubled loan had just been paid in full! He should have been happy, but somehow I'm afraid he wasn't. He didn't seem to know what to say.

I headed back to our offices, I had real estate leases to renegotiate for each of our stores; starting with the one in the Ala Moana Mall.

I love a good Crisis!

8/22/2017