When the Select Family of Staffing Cos., the Santa Barbara-based staffing services giant, filed a pre-packaged Chapter 11 bankruptcy on April 1, it listed between $50 million and $100 million in debts and $100 million to $500 million in assets.
But that is only part of the story. One of the 10 largest staffing firms in the nation, Select Staffing’s revenue approached $2 billion in 2012 and it plays a major role in providing temporary employees for the accounting, finance and information technology industries, filling some 300,000 positions each year.
Select’s April 1 agreement with creditors amounts to a near total recapitalization.
The reorganization will greatly reduce the ownership stake held by CEO and Chairman D. Stephen Sorensen and his family, although the family will remain at the helm of the business that Sorensen’s in-laws started decades ago.
The bankruptcy filing also ends a years-long search for a solution to the heavy debt load Select Staffing took on at the height of the credit bubble. The firm struggled with obligations that reached $535.5 million in 2010, when the company attempted to go public in a deal that was ultimately shelved. As the financial crisis unfolded, lender BNP Paribas, parent of Bank of the West, sold off the loans it had made to Select Staffing to a group of hedge funds.
“This is all about the financial crisis,” Sorensen, 54, told the Business Times during an extended phone interview on April 1. He said he had been in communication with roughly 100 hedge fund creditors who owned pieces of the loans in order to create a framework for the recapitalization.
“I would not have signed up for this, but you have to play with the cards you have,” said Sorensen, who holds an MBA from the University of Chicago.
In a statement, Select Staffing said that 90 percent of its first- and second-lien holders have agreed on the prepackaged plan, which would provide $225 million in new equity financing. Anchorage Capital, Blue Mountain Capital Management, Pine River Capital Management and Redwood Capital Management will provide the new equity. The pre-packaged plan, which was filed in Delaware, could result in a speedy reorganization because creditors already have agreed to the recapitalization.
The reorganized company will also include Decca Consulting, a staffing firm specializing in the energy business that is currently owned as a separate entity by the Sorensen family. Decca Consulting billed $128 million in revenue in 2013. The Sorensen family is essentially swapping its ownership in Decca for a stake in the post-bankruptcy Select Staffing.
Lenders will provide $50 million in debtor-in-possession financing. Select Staffing expects to emerge from the bankruptcy filing with an additional $120 million in revolving credit and a term loan of $350 million. Unsecured creditors won’t be affected, the firm said.
One of the largest privately held companies in the region with more than $1.9 billion in revenue in 2012, Select Staffing has faced a series of problems since the 2008 financial crisis. In addition to taking on hundreds of millions in debt at the height of the credit bubble, the company also made an $80 million cash-out for Sorensen and his family.
Select Staffing is one of the 10 largest staffing firms in the U.S., finding placements for about 300,000 temporary employees. It provides staff for accounting, finance and IT firms. The company has about 200 employees in the Tri-Counties and 1,100 around the world, according to Business Times records.
Sorsensen told the Business Times that he is in “advanced settlement talks” over litigation filed late last year by Bowery Opportunity Fund, which alleged, among other claims, that Sorensen had used the company as “his personal piggy bank” and had sought a restructuring deal that would treat Bowery and other creditors unfairly.
During the past 18 months, the company also has reached a settlement with the California State Compensation Insurance Fund. A jury found that Select Staffing had underpaid its workers compensation premiums and awarded the state fund $50 million. But the State Fund was unable to enforce the state court judgment because it had sued the wrong corporate entity and pursued Select Staffing in federal court.
Select is also facing a lawsuit from the Equal Employment Opportunity Commission filed in federal court in Tennessee on behalf of four workers there. The complaint alleges that Select discriminated against African American and non-Hispanic job-seekers and “gave preference to Hispanic applicants during the hiring process by not requiring criminal background checks and three months of verifiable employment of Hispanic applicants and requiring such information from non-Hispanic and African American applicants,” according to the court filing.
Select has denied the allegations in an answer to the complaint. The company said that some of the plaintiffs gave false information on their job applications and that much of the alleged discrimination is beyond the statute of limitations because the events happened between 2006 and 2008.
Sorensen said the company that emerges from bankruptcy will be more diverse and better capitalized than the Select Staffing that hit the wall after the financial crisis erupted in 2008.
“This is a transformational event,” he said, adding that while he was worried about the “drama and negativity” of a bankruptcy filing, he was intent on building a new business focused on the long-term.
The bankruptcy proceeding will result in drastically-reduced debt levels, Sorensen said, and he will be assembling a new board of directors that includes veterans of the staffing industry. Although Select Staffing will remain private, Sorensen said the goal is to institute governance practices that meet the New York Stock Exchange standards for publicly traded firms.
As part of the settlement with creditors, Sorensen and his family are contributing Decca Consulting, a separately-owned energy staffing firm, to Select Staffing in a diversification move. Sorensen said he was personally contributing a “small amount” of cash, which he described as less than $10 million, to the bankruptcy settlement.
Between Decca and their cash contribution, the Sorensen family will own a stake in the “low- to mid-teens” in terms of percent ownership, Sorensen said.
A hundred hedge funds
Select Staffing found itself in a deep financial hole after its principal lender, BNP Paribas, sold its Select Staffing debt. The debt wound up in the hands of what Sorensen estimated to be about 100 hedge funds.
He said he’s spent the past five years in meetings and negotiations in an effort to save the company he and his family built from scratch through aggressive dealmaking.
“A lot of my personal liabilities are being cleared up, and we’ve secured the stability of the enterprise and our people,” Sorensen said.
Although nearly all of the creditors have signed on, Sorensen said a small minority of equity owners has been non-responsive or remains opposed to the plan.
Select Staffing was advised by Alix Partners and represented by Goldman Sachs. Pachulski Stang Ziehl & Jones and Skadden Arps were its legal advisers. The lenders were advised by Milbank, Tweed, Hadley & McCloy.
[EDITOR'S NOTE: A version of this story was first published online on April 1, 2014. The version above appeared in the April 4 print edition].