Mastering the Turnaround

What it really takes to survive a corporate bankruptcy.

6: Fight for Flexible Capital

For many companies, overweight capital structures can cause a cycle of bankruptcies, so it makes sense that the last piece of advice is this: build a serviceable balance sheet during and after a reorganization.

“The capital structure has to line up with your strategy,” says McGahan. Within two months of joining St. Vincent’s, McGahan had negotiated with a new lender to take out the entire debt structure. The company paid off eight different bonds and revolving credit facilities with a single-term facility so that it could hawk valuable real estate or use it as new collateral. “Otherwise, we would have needed consent from the different bondholder groups for the asset sales,” McGahan says.

In Remy International’s case, debtor-in-possession and exit financing were negotiated simultaneously. Remy didn’t have to take on onerous covenants, as many Chapter 11 filers do, to get $330 million in financing from lead lender Barclays Capital and others, even though it exited during the credit crunch. That was because new capital came in behind the facility, CFO Laux says, in the form of $85 million of preferred shares. And the new capital had a payment-in-kind feature in case cash got sparse again.

Similarly, Calpine’s exit facility included an accordion feature that allowed leverage to increase at the company’s discretion. Corporate-level debt could expand to refinance more-expensive project-level debt used by some of Calpine’s individual power plants, CFO Donahue says.

“The CFO has to be the arbiter of what’s best for the company — from both a feasibility and a longevity perspective,” Donahue says about raising capital in bankruptcy. “The capital structure has to have a platform for growth.”

Growth, in fact, might be thought of as the light at the end of the tunnel. Entering a bankruptcy, CFOs could be forgiven for thinking they are heading toward that other kind of light, but that need not be the case. You can, in fact, turn things around.

Vincent Ryan is a senior editor at CFO.

Trying to Avoid Signals of Distress

In the current capital markets, CFOs hoping to avoid the “distressed” label and having their hand forced have to defend against investors in distressed assets. Distress investors may be looking to “loan to own,” whether by negotiation or by forcing a business into Chapter 11, says attorney Corinne Ball, leader of the bankruptcy practice at Jones Day.

The distressed investing industry is incredibly well organized, well capitalized, and well represented, says Ball, who advised Dana Corp. on its Chapter 11 filing in 2006. “They invest in your securities because they think the company is undervalued, but the bad news is they want to realize that value on their investment, not the equity,” Ball says. “They’re waiting for an event [like a proposed asset sale or a technical covenant default] that brings them into voice.” One of the issues that pushed energy supplier Calpine into bankruptcy two years ago was a lawsuit by bondholders that prohibited the company from using $313 million of proceeds from domestic-gas asset sales.

Well-prepared CFOs have a detailed knowledge of their company’s existing and expected compliance with the covenant and default provisions of all debts in the capital structure, Ball says. They also know the timing and extent of cross-default issues upon an “asserted” default. Of course, knowing the identity of the company’s debtholders is critical, so much so that gaining some control over who can own the company’s debt and trade it, by obtaining “consent rights” in lending agreements, may be worth an increased cost in exchange for the certainty. Don’t assume a refinancing is readily available, that a “misguided or incorrect” assertion of a default or even acceleration is harmless, or that a lender will waive a violation, Ball says. And if a committee of debtholders knocks at the door or fires off a furtive letter to the board, engage them, don’t slam the door. “Don’t pick a fight you can’t afford to lose,” she adds. — V.R.


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