Keeping Skin in the Game

Joining a bankrupt customer's creditors committee may preserve its viability -- and your assets.

The bankruptcy of Pacific Gas and Electric Co. in April 2001 came as no surprise to David Adante. Two months earlier, the CFO of The Davey Tree Expert Co., in Kent, Ohio, which trims brush and trees along utility power lines, had warned investors in an 8-K that the California energy crisis put PG&E — “a significant concentration of revenue” for Davey — at risk.

But Adante was “totally surprised” to get a call that same week from the U.S. Trustee’s office, asking him to serve on PG&E’s unsecured creditors committee. Except for a few large power suppliers, PG&E’s top 20 creditors were all financial firms, not trade creditors like Davey, which had $400 million in revenues last year. In this case, though, not only did the U.S. Trustee ask for a Davey representative, “they asked specifically for the CFO,” says Adante.

A CFO is a rare sighting on an unsecured creditors committee, which these days can have precious few trade creditors at all. The result, particularly in larger bankruptcies, is that such creditors risk being overlooked or overrun by the unsecured financial creditors — a trend that is accelerating as the very nature of bankruptcy changes. “Even the good customers [now] go [bankrupt],” says Valerie Venable, corporate credit manager for GE Advanced Materials, citing Dow Chemical Co.’s breast-implant filing and various asbestos cases as examples of otherwise sound companies filing Chapter 11. “It’s not just distressed situations; it’s companies filing to cap liability.”

In the PG&E case, notes Adante, “the utility was not in bankruptcy because it was insolvent; it got into a regulatory crisis, not a financial crisis, and that’s not something anybody can anticipate.” But, adds Venable, “that’s when the creditors committee really has to get in there and make sure we get our fair share. By the time you are done with legal fees, associated bankruptcy financings, and [customer flight], it could make the debtor distressed.”

Although large companies tend to rely on credit managers such as Venable to represent them, she says she is more likely to join a committee if it also has a CFO whose industry knowledge can complement her bankruptcy expertise. After all, say experts, if Chapter 11 is truly intended to restructure insolvent companies into going concerns, it needs industry experts to sit alongside the dominant workout groups and debt-holders. “I feel if [trade] creditors don’t get involved, the banks and the principals of the company move in the way they feel is most advantageous without input from trade creditors,” says Venable. “[But] trade is what keeps these guys going.”

A Seat at the Table

In Adante’s case, he says, “it didn’t take me long to figure out I wanted to be involved.” Not only did PG&E owe Davey more than $13 million, he says, but the utility was (and still is) Davey’s largest customer, accounting for $51 million — some 15.8 percent — of its 2000 revenues.


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