The optimal source of financing, say experts, is a third-party equity investor that is willing to make a long-term commitment and take part in managing the company. Such backing has proven to yield higher rates of success, according to Hotchkiss, because it both imposes discipline on the company to make radical changes and sends a signal “that at least someone is willing to take a bet on the company and stick with it.”
Given those indicators, McLeodUSA Inc. is on firm footing. The midwestern telephone company left Chapter 11 in April 2002 with about $3 billion of its original $4 billion in debt erased and access to up to $160 million in exit financing. Its annual interest payments were sliced by about 90 percent, from $365 million to less than $50 million. The company has also enjoyed the ongoing backing of buyout firm Forstmann Little, which now holds nearly 60 percent of McLeodUSA’s equity after investing nearly $1.2 billion in the company.
But investors are not the only ones skeptical of a bankrupt company’s future. Even in industries where defaults are common, “customers and employees get very nervous,” says Chris A. Davis, who led Cedar Rapids, Iowa-based McLeodUSA through the process as chief operating and financial officer and now chairman and CEO. So nervous, in fact, that Davis, current CFO Ken Burckhardt, and their team took pains to contact customers with phone calls and letters to let them know the company’s future plans as they began a strategic overhaul that involved selling $1 billion worth of assets and focusing on only the most profitable customers. They also put a significant portion of the creditor-approved $146 million capital-expenditure budget to work on speeding installation times, improving billing accuracy, and fixing network failure points.
Postbankruptcy, McLeodUSA also made an investment in employee training of around $2.5 million. “We made a decision that anyone who touched the customer or the network had to meet new ‘star quality’ standards,” says Davis, which are aimed at improving the quality of customer service. That led to a companywide skill assessment and certification process, which served “as a vehicle to motivate the workforce” as well as a boon for customers, she says.
These efforts seem to have paid off. Only 1 customer of the top 100 McLeodUSA had hoped to keep left during the bankruptcy process, says Davis. Meanwhile, employee turnover has decreased as much as 75 percent, from levels exceeding 100 percent per year in such departments as customer service and sales. “It’s an intangible return,” says Burckhardt, “but at the end of the day, it’s the employees who are going to make us successful.”
Wary vendors can also affect a company’s efforts to get back on track. Troy, Michigan-based Lason Corp., a document-management firm, is heavily dependent on temporary staffing firms when big projects come along. Since its bankruptcy filing last year, though, credit terms shrank from as many as 45 days to as few as 7, and “we have lost any sort of favorable pricing, since our vendors want to make back the money they didn’t get while we were in Chapter 11,” says CFO Doug Kearney.