Debt, Accounting Issues, Recession Led Cynergy Data to Bankruptcy

With $83 million in debt added since 2007, accounting errors, and finally the recession, the big independent sales organization Cynergy Data LLC concluded late this summer that it needed bankruptcy-court protection, according to an emerging picture of the company as it seeks to sell its assets to a private-equity firm. Long Island City, N.Y.-based Cynergy Data has enough debtor-in-possession financing and other resources to pay its employees, suppliers, and more than 40 ISOs and 300 agents that rely on the company for processing, chief executive Marcelo Paladini tells Digital Transactions News. “That's going to keep us operating as normal,” he says. Cynergy Data, which has a portfolio of nearly 80,000 merchants that generate more than $10 billion in annualized charge volume, on Tuesday filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Wilmington, Del. The court on Wednesday approved a number of motions to keep the company operating as it prepares for a prearranged asset sale to West Palm Beach, Fla.-based The ComVest Group (Digital Transactions News, Sept. 1). The bankruptcy petition lists assets of $109.5 million and total debts of $186.2 million. In a court filing, Cynergy Data's so-called chief restructuring officer, Charles M. Moore, detailed the company's financial decline that led to bankruptcy. He noted that Cynergy Data in 2007 bought another ISO, Abanco International, for $36.5 million. Also, Paladini bought out his co-founder for $46.5 million. Lenders backing Cynergy Data's senior and junior credit facilities provided the financing for both transactions. But after he briefly described those two events, Moore then noted that “during 2007 and 2008, however, certain errors were made in the internal accounting and financial reporting of the debtors that had the effect of misstating certain revenues and expenses. These errors were uncovered in March 2009, when Cynergy Data was already severely impacted by the economic downturn.” Cynergy Data brought in FTI Consulting Inc. to investigate. FTI recommended restating 2007's and 2008's financial results, which lowered earnings. That led Cynergy Data to hire CM&D Management Services LLC, a turnaround firm in suburban Detroit where Moore is a senior managing director, and other advisors. The process ultimately led to the decision to sell the company's assets to ComVest in a court-supervised process. Paladini refuses to give details about the accounting errors. “It's basically a problem we fixed and put financial controls in place,” he says. “We have found it was an error, we haven't found any fraud.” He adds, however, that the souring economy took a heavy toll on the company's financial projections and ultimately on the cash available to meet its obligations. Based on its rapid growth in 2007, Cynergy Data projected monthly charge volume of about $1 billion by the end of 2008, according to Paladini. But the recession hit mid-year. “It [charge volume] was about 20% lower than what we had projected for the year,” he says. Some observers have said that high residuals, or payouts to salespeople, that might have been justified during flush times are now hurting many ISOs (Digital Transactions News, Sept. 2). Paladini would not discuss Cynergy Data's compensation processes in detail, but says the company is moving toward more of a direct-sales model that will lower expenses. The planned sale to ComVest, meanwhile, should come in 60 to 90 days in a so-called stalking-horse auction process supervised by the bankruptcy court, according to Paladini. It is possible that another buyer could acquire Cynergy Data's assets by submitting a higher bid than the floor price ComVest establishes at auction. But both Paladini and Moore in his filing noted that ComVest, which has holdings in several merchant processors, emerged as the prospective buyer after a careful vetting process. “We did lot of due diligence,” Paladini says. “We feel ComVest is a very strong contender.” Inc. magazine listed Cynergy Data's 2007 revenues at $140.2 million, up from $21.9 million in 2004. More recent figures were not immediately available.