Second Acts

After bankruptcy, companies often teeter between encore and final curtain call.

As a result of that filing, which let the company shed 36 of the 76 companies it acquired between 1996 and 1999 and avoid $80 million in earnout payments, Kearney estimates Lason is paying 5 to 10 percent more for staffing services. Meanwhile, lease rates for new properties are “insane,” at 18 to 20 percent, according to Kearney, and letters of credit now require 100 percent collateral plus 15 percent in fees, up from the 1 percent in fees the company typically paid prebankruptcy. The heightened costs mean “your hands are tied” when it comes to managing expenses, says Kearney, with no end in sight. “Maybe things will change when we have 18 months of financial performance behind us, but I expect we’ll be fighting these issues for a while.”

On The Bright Side

Despite the pitfalls, bankruptcy often remains the best hope to reposition a viable company for long-term growth. “If a firm is worth more alive than dead, or liquidated, you can maximize returns to all constituencies if you just give it some breathing room,” says Stuart Gilson, a professor at Harvard Business School. His research shows that companies that attempt reorganization outside of bankruptcy court are 50 percent more likely to fail than those that go into Chapter 11. Why? Bankruptcy proceedings require agreement among a smaller majority of investors than most out-of-court deals, meaning more creditors can be forced into forgiving debt.

In fact, simply going through the bankruptcy process often creates brighter prospects, say CFOs who have done it. “Once we stopped paying interest, we had plenty of [cash] to run the business,” says Chiquita Brands International Inc. CFO James Riley. Two years ago, Cincinnati-based Chiquita filed for bankruptcy protection after an $84 million bond payment came due against a cash balance of less than $70 million. The company’s problem — namely, an oversized debt load geared to an expansion plan that had been squashed by European Union trade restrictions — “was fixable,” and well served by the relief Chapter 11 afforded, says Riley, who joined as CFO in January 2001.

Since most of the debt was at the holding company, Chiquita’s 400 operating units were untouched, meaning vendors and creditors were paid in the ordinary course of business, says Riley. Customers stuck with the company. Along with swapping $861 million in debt plus accrued interest for a $250 million new bond issue and 95.5 percent of the new equity, Chiquita was able to write down a profit-draining unit in Panama without violating loan covenants, thanks to “fresh-start” accounting.

Still, 2002 was a tough year for Chiquita, due to global competition depressing banana prices as well as the costs associated with the restructuring. The company ended the year with a fourth-quarter EBITDA that was 72 percent below the previous year’s figures. While last quarter saw a healthy profit, Moody’s Investors Service analyst Helen Calvelli cautions that the EU may strike again, with a decision expected in 2006 that could curb Chiquita’s long-term sales prospects.

Tell It To The Judge

Chiquita’s mixed results illustrate the difficulty of assessing postbankruptcy success, particularly in a recession. “You would like to see profits almost immediately after emergence, if you haven’t already,” says Whyte. “But when whole industries are in trouble, a lot of these benchmarks are hard to talk about.” Most companies will argue that their sales figures have been depressed by the recession. And stock prices may not be fair indicators, given the state of the equity markets and the abnormal sell-offs a stock may experience if former bondholders cash out en masse.

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