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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 21, 2008 12:01 AM ET
The combination of less readily available—or at least considerably more expensive—credit for certain companies, heavy debt loads left over from the buyout boom and a weakening U.S. economy has driven up the number of U.S. companies filing for bankruptcy and seems bound to continue to do so. But while in past cycles bankruptcies typically meant a long and painful process for companies, that may be less the case this time around because lawyers expect a significant pickup in the use of prepackaged bankruptcies. Such bankruptcies, also called prepacks, save time and money for all parties involved, from the company and its vendors to its creditors. That’s because they allow a company to prepare a reorganization plan that is negotiated and voted on by creditors and stockholders before the company actually files for bankruptcy, which simplifies and reduces the time spent in court. Courts in some states, such as Delaware, can approve a restructuring plan in a prepackaged bankruptcy in as little as 90 days, compared with several years for so-called free-fall bankruptcies. “There’s a growing likelihood that there’ll be a lot more interest in prepackaged bankruptcies,” predicted Roger Frankel, a partner and chairman of the creditors’ rights and bankruptcy group at Orrick. Data are already confirming that trend. Of the 34 bankruptcies of public companies this year through April 15, six, or 17.6%, were prepackaged or prearranged, according to BankruptcyData.com, a Boston-based researcher. For the same period last year, as well as for all of 2007, 5% of all public company bankruptcies were prepackaged or prearranged. Bankruptcy filings by U.S. businesses spiked 44% in 2007, to 28,322, from 19,695 in 2006, according to data released last week by the Administrative Office of the U.S. Courts. In one recent example, Sirva, a relocation services company based in Chicago, said at the beginning of February that it had reached an agreement with lenders to restructure its senior secured debt through a voluntary prepackaged Chapter 11 reorganization. There have been rumors this month that Linens ’n Things owner Apollo Management may be preparing a prepackaged bankruptcy for the company. Prepackaged bankruptcies have been around for years, but they’re getting more attention in this cycle, mostly as a result of the private equity craze of the last couple of years. The best candidates for prepackaged bankruptcies are companies that have liquidity problems but whose business is still viable, Mr. Frankel said. “You’re talking about a healthy business that just has too much debt,” he said. “You can’t always do that if a company is hopelessly insolvent.” There are plenty of companies around that fit that description, given that the buyout frenzy led companies to pile up debt on their balance sheets. With the cost of debt rising in the past year—especially for junk-rated companies—some companies are still generating cash flow but not enough to pay off interest. Another reason for the expected popularity of prepacks is that a lot of the debt used to fund leveraged buyouts was secured debt—typically leveraged loans—rather than junk bonds. As a result, companies have a smaller number of creditors, which makes it easier to prepackage a bankruptcy. “With some of the troubled businesses, the lineup of the key creditor constituency is not as long as during the last cycle,” said Richard Chesley, a partner with Paul Hastings. “Because you’ve got a smaller roster of big creditors, it’s a little bit easier.” The new bankruptcy code enacted at the end of 2005 provides added incentive to go for a prepackaged bankruptcy. A major change to the law is that after filing for bankruptcy protection, companies have only 18 months to come up with a reorganization plan. Previously companies could get numerous extensions; now once the 18 months are up, creditors can step in with their own plans. Given the tighter deadline, “the more a company can do before it files, it will benefit from that,” Mr. Frankel said. Prepackaged bankruptcies can also be especially attractive to companies that have to deal with creditors and customers outside the U.S. that aren’t used to bankruptcy restructurings and often mistake them for liquidations. Still, prepackaged bankruptcies aren’t for every company, and challenges can arise. Mr. Frankel noted that companies whose troubles go beyond simply the need to refinance debt, such as those facing operational problems, wouldn’t be appropriate candidates. Another possible glitch, which can also occur in free-fall bankruptcies, is that creditors may not all agree with the company’s restructuring plan. A company typically needs to obtain agreement from holders of two-thirds of each class of debt involved in the restructuring and from 51% of the number of creditors in each debt class for the plan to be approved. But a company may not have enough time or may fail to receive the required creditor approval to cut a prepackaged deal. That was the case for Mirant, the Atlanta-based utility, which tried to do a prepackaged bankruptcy in 2003 but failed to obtain approval from two-thirds of its debt holders. Though Mirant ended up seeking Chapter 11 bankruptcy protection to organize a restructuring plan, prepackaged bankruptcies that fail to get debt-holder approval often end up being prearranged before a company goes to court. A prearranged bankruptcy is similar to a prepackaged one but instead of having a plan agreed upon in writing, the parties have only an oral agreement. A prearranged bankruptcy typically outlines the broad framework of the restructuring plan. “It’s easier to talk about [prepackaged bankruptcies] than to get them done,” said Mr. Frankel. “Often they end up being prearranged because you run out of time.” FW
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