Restructuring Redux?

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

Al Koch, managing director at restructuring advisory firm AlixPartners LLP, concurs. “The numerous tranches add a singular complication,” he says. “In 2001, you didn’t see nearly as many lenders as you do today. Many more hedge funds hold significant positions, and the fights between the senior secured [lenders]; the hedge funds, which hold second liens; and the unsecured debt are a dynamic that is only beginning to play out.”

The new bankruptcy law may ease the process. It sets an 18-month deadline on a debtor’s exclusive right to file a bankruptcy reorganization plan and a 20-month deadline on having it accepted by creditors and the bankruptcy court. The limitation “means companies have to get in and out quickly, and doing all their planning ahead of time before they actually file will be more important than ever,” says Bill Hass, CEO of TeamWork Technologies. “When you plan ahead you often find alternatives to avoid bankruptcy, such as a partner or another lender.”

Hass cites the example of troubled privately owned Bay Furniture Co. in Chicago. “It’s a 66-year-old, six-store chain that has been family-owned for decades and was basically liquidating itself,” he says. Rather than file for an in-court bankruptcy, it chose instead to initiate an “assignment for the benefit of creditors,” an out-of-court bankruptcy that allows a debtor to settle up with creditors. Recently, Great American Group lined up to buy the company, allowing it to avoid the costs of bankruptcy. And creditors were able to get what they could from Great American. Bay Furniture had listed $11.2 million in assets and $14.4 million in liabilities.

The new law could also change the destinies of bankrupt companies in another way. Bill Repko, senior managing director at investment banking boutique Evercore Partners Inc., predicts that the shortened bankruptcy-filing process will spur an increase in mergers and takeovers prior to and during restructuring. “You can’t afford to ignore strategic issues anymore, which will drive merger-and-acquisition techniques as part of the restructuring, something that typically came later in the process,” he says.

PSINet trod the well-worn path of restructuring followed by a sale, rather than a sale midway through the process. Hyatt agrees M&A scenarios might come into play earlier were he shepherding PSINet through bankruptcy today, if for no other reason than companies’ underlying businesses are now likely to be profitable and, therefore, attractive. “In 2001, that wasn’t the case,” he says. “We were focusing on restructuring businesses at the same time that we were restructuring balance sheets. This time around the focus will be a lot more on the balance sheets than the business, which is inherently healthy.”

Not that PSINet didn’t have a suitor as it contemplated Chapter 11. The company actually held off its bankruptcy filing for a full month to study an offer from an unlikely bidder — Enron. “We were negotiating with Enron to buy PSINet,” Hyatt confides. “They laid out an off-balance-sheet accounting plan that would somehow allow us to recognize a gain. It just smelled wrong. We went so far as to consult with outside counsel.”

PSINet never finalized its thinking about the deal. Instead, Enron finalized it for them. “We had a bunch of Enron and [Arthur] Andersen guys in our headquarters for weeks, and one day they just vanished,” Hyatt says. “At that point, the deal died.”

A few weeks later, he knew why.

Russ Banham is a contributing editor of CFO.

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