Mastering the Turnaround

What it really takes to survive a corporate bankruptcy.

Communication to the outside world has to be assigned to the right personnel. The CFO may be the one who has to call the credit manager of the company’s largest supplier, explain the rescue plan, and negotiate the terms on which the vendor will start supplying product, he says. The aim: to demonstrate that the business will continue to exist and creditors won’t get burned.

Bankruptcy is a public forum, explains Lisa Donahue, co-head of the turnaround and restructuring practice at AlixPartners and the CFO of energy supplier Calpine, which went through a contentious two-year reorganization before exiting last February. “Sharing as much information as possible with creditors makes the process easier,” she explains. At Calpine, which filed with $18 billion in debt and operating losses, Donahue and her team set up weekly conference calls with all creditor committees so they could review power-plant sales proposed by management and ask questions. “Make it as orderly and consistent as possible, and have an agenda,” Donahue suggests.

5: Seek the Greatest Good

It pays to play ball in bankruptcy — at least when it comes to cutting in creditor classes and maximizing their recovery. With companies now having just 180 days to file their own reorganization plan, Calpine felt the time pressure, Donahue says. But because the company coordinated very closely with constituents, it was able to overcome that hurdle — the technical expiration of the “period of exclusivity” deadline passed with little notice. And, before all was said and done, Calpine was also able to get the best deal for creditors — general unsecureds recovered 85 percent or more and equity holders received warrants to purchase new common stock. “I don’t believe adversarial is the best approach to restructuring,” Donahue says.

At Solutia, as one of his first steps, Sullivan froze the company’s defined-benefit plan, which was underfunded by $500 million. But instead of ditching pensioners altogether and leaving them to the Pension Benefit Guaranty Corp., the company tapped its debtor-in-possession financing to inject $300 million into the plan. “We needed the support of the people in the pension plan,” Sullivan explains. “And there would have been another claim against the estate that would have diluted recoveries, so bondholders backed it.”

The prevalence of distressed asset investors holding corporate debt, a common occurrence of late, actually presents an advantage in this context. Some of these investors tend to look at their stake as an equity investment, so they may be happy with 80 cents on the dollar if they bought the debt at a lower price. That can potentially leave some value or cash for creditors further down the priority waterfall, says BDO Consulting’s Lenhart. “They don’t have to hit a home run on all their deals,” he points out. Likewise, senior lenders are often amenable to “give-ups.” “Pigs get fat, hogs get slaughtered,” CRG’s Kuoni says. First-lien lenders recognize that if they wipe out equity 100 percent, they will lose the cooperation of equity in a reorganization process, possibly leading to a pure liquidation, he explains.


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