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Chemical Bank transferred Swirl's account to its workout division
in March 1986.
Swirl needed about $3.8 million to operate, but only had
enough collateral to secure a $3.3 million loan. Swirl sought
debt financing from five lenders but was not successful. No
lender would lend Swirl $3.8 million without additional
collateral from Swirl or a capital infusion from Chemical Bank.
In May 1986, Swirl hired Financo, Inc. (Financo), a subsidiary of
Shearson Lehman Brothers, Inc., to find a buyer or investor for
Swirl. Financo found neither.
E. Chemical Bank and Swirl's New Financing Arrangement
1. The New Agreement
In September 1986, Chemical Bank told Swirl that it was
willing to continue to lend funds to Swirl if its financing
arrangement could be restructured. Swirl and Chemical Bank
executed a new financing agreement (new agreement) on October 15,
1986, which gave Swirl a revolving line of credit secured by 80
percent of the net amount of its receivables. About $1.5 million
of the old line of credit was replaced by two promissory notes
payable to Chemical Bank. The promissory notes required Swirl to
pay eight quarterly installments of $187,500 starting on
January 15, 1987, and interest at a rate of 2 percent higher than
Chemical Bank's prime rate. The promissory notes were secured by
Swirl's accounts receivables, machinery and equipment, and the
cash surrender value of its officers' life insurance.
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