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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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November 2, 2008 12:01 AM ET
Getty Images
Troubled businesses that in years past might have been able to restructure are increasingly being forced to liquidate, because skittish lenders are pushing for fire sales to recoup what they're owed as soon as possible. Changes made to the bankruptcy laws three years ago have also accelerated the bankruptcy process, putting pressure on debtors to wind down if they don't immediately turn out a viable restructuring plan. Meanwhile, the dreary credit markets are making it tougher for borrowers on the skids to line up what is called debtor-in-possession financing, or credit lines used to finance a business through the bankruptcy process. And on top of all that, companies filing for bankruptcy today are in relatively worse shape than the troubled companies in the last wave of bankruptcies in 2001, thanks to the easy financing available during the boom times of 2006 and 2007, according to Darryl Laddin, who heads the restructuring practice at law firm Arnall Golden Gregory in Atlanta. Tough competition in the lending market in the past two years enabled borrowers to secure credit lines that carried few, if any, covenants (restrictions that enable a lender to call in a loan). A covenant breach is a red flag that gives lenders the leverage to force a faltering borrower to take measures to steer clear of the brink. Without such safeguards, many companies are already beyond saving by the time they dial up a bankruptcy attorney, Mr. Laddin said. “I call them "zombie Chapter 11s,' because there is no real ability to reorganize,” Mr. Laddin said. “They are not coming into bankruptcy with a game plan to reorganize, they're limping in. And rather than be in the ICU, if you will, they've already got one foot in the morgue.” Creditors, mindful of the concessions they made during the days of easy credit, are taking a hard line with companies seeking a court or out-of-court restructuring. These factors have already resulted in more corporate liquidations this year through October than in all of 2007, sinking such household names as Linens "n Things, Sharper Image and, most recently, Mervyns. While retailers have been hardest-hit by the trend, it has also claimed lesser-known outfits like Plastech Engineered Products, a supplier of auto parts, and Torrent Energy, a natural gas firm, among others. Then there's Lehman Brothers, the largest bankruptcy to date, which is in the midst of a chaotic liquidation, with assets being sold off to Barclays Capital and Nomura Holdings. The speed of the investment giant's liquidation has been striking, as it won permission to sell off its U.S. broker-dealer and investment banking divisions just five days after filing for court protection in September. Even more corporations will vanish as the default rate—and the number of subsequent bankruptcies—rises, according to Standard & Poor's analyst Tom Mowat. S&P found that as of mid-October, 24 U.S. corporations had filed to liquidate under Chapter 7 bankruptcy protection or converted a Chapter 11 case to Chapter 7, according to Mr. Mowat. “There may be more of these liquidations rather than reorganizations,” he said. Last year, just 17 U.S. companies liquidated. That is in part due to a dwindling DIP financing market, which is contracting as hedge funds flee the sector and banks tighten lending standards. Bankrupt companies that aren't generating cash or are just breaking even are succumbing to asset sales, since lenders are unwilling to extend them a lifeline through restructuring, Mr. Mowat said. And even when a firm does line up DIP financing, the credit line has strings attached in the form of restrictions that enable the lender to push for a sale if it doesn't like the way the restructuring is taking shape. For example, Torrent Energy, which filed to reorganize under Chapter 11 in June, announced in September that it would have to initiate an asset sale after its DIP provider, YA Global, decided to cut off financing. Creditors, which often assume control of a bankrupt entity, are simply less willing to back a restructuring plan given the teetering economy. They would rather push for a recovery via a fire sale, particularly if the borrower is a retailer whose collateral is diminishing in value in light of the slowdown in consumer spending. 
AP (2); Getty Images
SHOP TILL THEY DROP Among the companies that have had to exit Chapter 11 via liquidation, rather than restructuring, are the retail chains Linens ‘n Things, Mervyn’s and Sharper Image.
A handful of other retailers have gone the way of Linens "n Things, with Mervyn's and discount chains Value City Department Stores and Shoe Pavilion all announcing last month that they would shut down after their restructuring plans didn't work out. Retailers, which are taking the brunt of the economic downturn, have also been particularly hard-hit by changes to the bankruptcy code in 2005 that narrowed the window for emerging from a court restructuring, according to Lawrence Gottlieb, who runs the bankruptcy practice of New York law firm Cooley Godward Kronish. A new provision gives retailers just 210 days to decide what store leases they want to terminate, whereas in the past they could delay the decision indefinitely. The new deadline has pressured bankrupt retailers on two fronts. First, they now have just seven months to lock in a restructuring plan, which can be particularly troublesome given that retailers book most of their profits during the all-important holiday season. So they no longer have the luxury of adjusting their restructuring initiatives through a Christmas or two, Mr. Gottlieb said. For instance, prior to 2005, retailers such as Macy's and Federated Department Stores took more than two years to emerge from bankruptcy, a time frame that is not an option under the new code. Secondly, that 210-day window has created conflict between retailers and their banks, because it introduces a slew of risks to the lender's position, Mr. Gottlieb said. Should a retailer opt to assume—rather than terminate—a store lease, the lender's interest becomes subordinate to that of the leaseholder, who is entitled to up to two years of rent should the tenant go bust. The lender also sees its ability to recover its loan hampered when a chain terminates a lease. That's because lenders have the highest recovery rate when they liquidate inventory at the store level in a going-out-of-business sale. That ability may be lost at some locations after the 210-day window closes. This has meant that lenders are now forcing retailers to find a new owner via auction or else face liquidation, as happened at both Linens "n Things and Shoe Pavilion. “How much can you do without going through a Christmas to see if your plan works?” Mr. Gottlieb said. “The point is they're just not giving the debtor the time to reorganize.” FW
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