Creditors Eager to Speed Up Bankruptcy Process
Kleege, Stephen, American Banker
When Chemical Banking Corp. decided to offer an $80 million "exit loan" to Harvest Foods Inc. - a company that was about to file for reorganization under Chapter 11 of the Bankruptcy Code - it set the stage for a record breaking performance.
The Little Rock, Ark., grocery chain made a successful exit from bankruptcy a mere 16 days after filing with the court late last year, beating the previous record for fastest bankruptcy, held by In Store Advertising, by 13 days.
Aside from putting Harvest in contention for a dubious achievement award, the record also represents a significant trend in banking.
Faced with the costly delays and exorbitant fees of a traditional bankruptcy battle, more lenders and their borrowers are trying to shorten the process. They are hammering out debt restructurings out of court or, like Harvest Foods, arranging prepackaged bankruptcies in which the parties agree to a plan before filing with the court.
In fact, last week's filing by Trans World Airlines was a "prepack," as bankruptcy professionals call them. The airline's creditors agreed to submit a plan to bankruptcy court in which $500 million of debt will be forgiven and the company will emerge from bankruptcy, presumably in a better position to survive, as early as September.
"We're seeing a lot more willingness on the part of creditors to listen, rather than go to court," said Paul Luftig, principal in the Epic Group, a New York debt-restructuring consultancy.
"What you really want to do is preserve value," explained William C. Repko, the managing director of restructurings at Chemical who was called as an adviser by a Harvest bondholder that had had a long relationship with Chemical.
The key question in any restructuring, according to Mr. Repko, is what will be left after the reorganization. Often, he said, the bankruptcy process itself can significantly reduce the value of a business as a going concern - and its ability to carry debt.
"You look at a business on an unleveraged basis," he said. "It's got the opportunity to earn a certain amount of cash flow. Then you make a judgment, as you do in any lending decision. Then you calculate how much debt can get layered on and still have a good credit."
In the Harvest case, potential legal fees and delay were not the only factors weighing against a traditional bankruptcy. The company was the beneficiary of some tax breaks that would have been lost and business laws that would have been changed if the company was in bankruptcy at yearend.
That would have made it impossible for the bank to approve the $80 million loan, Mr. Repko said.
The solution was to agree in principle to the $80 million loan prior to the bankruptcy filing, but make the loan contingent on a successful restructuring before the end of the year. With the financing agreement in hand, Harvest was able to quickly arrange a settlement with its other creditors, reducing total debt from $145 million to $80 million, while raising capital for new acquisitions.
Bankers and consultants said the trend toward out-of-court and prepackaged settlements has gradually picked up steam since the mid-1980s, when bankruptcy lost the stigma it once had and became a commonplace tool for overleveraged companies.
Indeed, Mr. Repko notes that two of the seminal workouts - by International Harvester and Chrysler - were out-of-court arrangements.
Although Congress last year approved legislation to streamline proceedings for bankrupt companies with $2 million or less of liabilities and to place some limits on professional fees, "on a significant case there has been nothing legislated that would really affect the timing cost and uncertainty cost," said Mitchel H. Perkiel, a lawyer with Kay, Sholer, Fierman, Hays & Handler in New York.
When time comes to restructure debt, he said, "it still behooves management to give first and primary consideration to the out-of- court process,"