That’s a tough charge, though, since most CFOs say burned bondholders generally hold the power in such negotiations. “Senior lenders had an opportunity to force the company to do whatever they wanted,” says Lason’s Kearney. He counts himself fortunate that the lenders agreed to take equity, knowing that “they’re not paid to take risks; they’re there to get paid back.”
The challenge may be even more difficult in light of personal incentives that do little to deter CFOs from rubber-stamping poor plans. “Unfortunately, we see a lot of situations where CFOs are [encouraged] with big retention bonuses to get the company out of bankruptcy faster than they really should,” says Larratt-Smith. However, he adds, “strong CFOs won’t ever allow themselves to be swayed by that, because they also know that there’s nothing worse on your résumé than a Chapter 22.”
And once out of bankruptcy, CFOs must step into their classic role: the naysayer. CFOs “need to be the voice of reason for a company that is often not yet back on terra firma,” says Whyte. “They’re the guardians of the bank. And if the cash is not watched closely, the company could find itself back on the road to bankruptcy in a very short time.”
Sidebar: Sold-Out Performances
Companies rarely officially liquidate through a Chapter 7 filing, considered a clear sign of failure by most bankruptcy experts. These days, though, many are effectively opting to liquidate by selling off major assets within bankruptcy protection, à la Comdisco, Budget, and TWA, and then dissolve.
Why the shift? The strategy used to be impractical, since judges required a formal plan of reorganization and creditors’ approval before allowing the deals. Since the mid-1990s, though, judges have been using a provision of the federal bankruptcy code known as section 363 to push the sales through without the process. Including those so-called 363 sales, liquidations have risen from an historical 5 percent of cases to nearly 50 percent in 2002, according to UCLA Law School professor Lynn M. LoPucki.
While the lack of input from creditors raises the problem of sweetheart deals between managers and buyers (see “What’s Wrong with this Picture?” January), some say the asset sales make better economic sense than reorganizations. “A buyer brings fresh financing, fresh ideas, and new energy,” says bankruptcy attorney Richard Tilton. “For a lot of companies, that may be the best way to preserve asset values — and jobs.”
Sidebar: Coming Attractions
WorldCom (now MCI) — filed July 2002, hoping to emerge by September 2003.
The Plan: The telecom giant expects to retain most core assets, cut liabilities from $42.5 billion to $12 billion, and grow profits by more than 300 percent over the next two years while boosting revenues by about 12 percent, to $27.8 billion by 2005. Estimated enterprise value: $12 billion.
The Prognosis: Skeptics note that revenues are generally declining within the industry, and that low capex spending during bankruptcy may hurt it. But few believe the company will fail again. “WorldCom is setting itself up to be a great growth company,” says Vik Grover, vice president at Kaufman Brothers. It is the “best-positioned M&A candidate” in the industry, with Verizon a likely buyer within the next two years.