Restructuring Redux?

Thanks to the availability of cash, the options for bankrupt companies — and their advisers — abound.

Larry Hyatt is no stranger to restructuring. In 2001, Hyatt, then-CFO of pioneering Internet service provider PSINet, navigated the company through its 13-month bankruptcy and a subsequent restructuring that included the sale of parts of its several business lines. Cash-flow positive a year later, PSINet emerged from bankruptcy and was sold to Cogent Communications.

If Hyatt were to attempt the same restructuring work today, he says, he would face a very different challenge. “Companies like PSINet that went into bankruptcy in 2001 were burning cash,” says Hyatt, now CFO of O’Charley’s Inc., a Nashville-based $1 billion (in revenues) restaurant company. Most were publicly held. “This time around, suspect companies are likely to be held by private equity. They are generating, not burning, cash. Their underlying business is likely to be profitable.”

The upshot? “In the telecom arena, the business has become more globalized,” Hyatt says. “Consequently, the U.S. and international pieces of a company like PSINet might be more valuable if they were part of the same company and sold as a unit. Restructuring is sensitive to a particular era.”

Unlike 2001, this particular era has been characterized by the availability of cash: more buyers with deep pockets mean more bankruptcy and restructuring options for troubled companies. “If the business model of a company in bankruptcy is fundamentally sound, it will have ample sources of financing available,” says Dennis Hernreich, CFO and chief operating officer of Casual Male Retail Group Inc., who was part of an investor group that purchased the clothing retailer in 2002 following its 2001 bankruptcy. In fact, companies that might have been in a turnaround situation 18 months ago have managed to stay afloat thanks to an influx of cash to sustain operations, adds Linda Delgadillo, executive director of the Turnaround Management Association.

Inevitably, however, the gravy train will stop. And 70 percent of 90 restructuring professionals surveyed last year by the American Bankruptcy Institute (ABI) and Daily Bankruptcy Review, for example, believe we will see an increase in U.S. corporate restructurings, starting this year. Global Insight, a financial forecasting firm, expects the 20 percent decrease seen last year to give way to an approximate 17 percent increase this year, with the metals, mining, energy, and real-estate sectors cited as especially vulnerable. Meanwhile, some bankruptcy-law firms and investment banks are beefing up their restructuring staffs.

When and if a wave of restructurings happens, it could get ugly. Anders J. Maxwell, a managing director at investment banking advisory firm Peter J. Solomon Co., compares the possibility with the last two waves in 1989 and 2001 this way: “In 1989, we had great companies but bad balance sheets. In 2001, we had bad companies but okay balance sheets. This time around we have bad companies and bad balance sheets — a double whammy.”

Waiting for a Trigger

Restructurings in 2007 confront a far different business environment than those from 2001, a year marked by corporate scandals, terrorism, and the bursting of the technology bubble — the trigger for PSINet’s problems. A new bankruptcy law has taken effect, one predicated on speeding up the process. In addition, the nature of financing has changed. Rather than rely on a primary lender, as they typically did in 2001, companies have contracted with a plethora of lenders in multiple tranches, “guaranteeing a knife fight down at the bankruptcy court,” quips bankruptcy lawyer John Penn, a partner at law firm Haynes and Boone.

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