Magazine article Business Credit

Changes in Code, Recession Make Preplanned Bankruptcies More Attractive

Magazine article Business Credit

Changes in Code, Recession Make Preplanned Bankruptcies More Attractive

Article excerpt

Six of the 10 largest commercial bankruptcies for 2015 were filed as prenegotiated or prepackaged Chapter 11 cases. Each of these companies entered bankruptcy with assets valued at more than $2 billion, according to global law firm Jones Day.

One credit professional recently expressed concern about whether these types of bankruptcies were likely to increase. When it happens, it seems to happen overnight, she said. She recalled one company that even relocated from The Netherlands to the United Kingdom because of debtor-friendly bankruptcy laws. In the paper industry, which her company serves, a lot of companies are struggling, so it's something she's keeping an eye on.

NY-based attorneys Bruce Nathan, Esq., of Lowenstein Sandler LLP, and Morris Massel, Esq. of Simpson Thacher & Bartlett LLP, however, have not noticed anything out of the ordinary. "Those [prepackaged cases] have been going up in response to changes in the bankruptcy code in 2005 and the increase in Chapter 11 filings as a result of the recession in 2008," Nathan said. Massel agreed, "I haven't seen a dramatic rise that's out of sync with the number of fillings." As bankruptcies increase, so will the number of prepackaged cases, he added.

From 2005 to 2007, the number of publicly traded companies that filed prepackaged bankruptcies averaged about three a year, according to data provided to NACM by In 2008, the number climbed to 11; and in 2009, it more than doubled to 24. The number fell slightly in 2010 to 17 and more dramatically in 2011 to four. The past few years have posted about 10 per year.

Prepackaged vs. Prenegotiated Bankruptcies

Nathan cautions for the need to differentiate between prepackaged and prenegotiated bankruptcies. "Use of the terms sometimes gets sloppy," he noted. A prenegotiated bankruptcy typically is negotiated with one class of creditors, such as secured, prior to a bankruptcy filing. A prepackaged bankruptcy is essentially a Chapter 11 plan that provides treatment of all classes of creditors on a consensual basis and is filed at the same time as the bankruptcy, Nathan further explained. Typically, "Unsecured creditors get paid in full and it goes fast--45 to 60 days--it's a prepack," he said.

Either type can bring an element of certainty, Massel said. He considers flexibility to negotiate and the potential cost savings due to less litigation time additional advantages. "Being in bankruptcy is extremely expensive," Massel noted. "In a prepackaged bankruptcy, because the debtor's time in Chapter 11 is minimized and the debtor has a clear path out of bankruptcy, far fewer business decisions require court approval. In a prepackaged or prenegotiated bankruptcy, during the pre-filing period, which is when the company formulates, negotiates and documents the proposed plan, the company does not have the protection afforded by the automatic stay, which means that creditors can enforce remedies against the company and its assets at any time."

A prepackaged or prenegotiated bankruptcy allows the company to impose a treatment of claims on dissenting creditors so long as the company satisfies the confirmation standards of the Bankruptcy Code, he added.

Creditors can decide not to participate in the agreement prior to the Chapter 11, Nathan pointed out. "You can't force them." However, a prenegotiated bankruptcy can use the process to pressure creditors to go along, he added. Because these processes usually move much faster than a conventional bankruptcy, Massel said, "it puts more pressure to respond faster on any party that wants to object. …

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