Breezing Through Bankruptcy

Companies filing for Chapter 11 protection are exiting sooner than ever, but is faster always better?

The bankruptcy process is a lot faster than it used to be. When United Airlines entered Chapter 11 in 2002, for example, it languished there for three years. By comparison, in 2009 automaker Chrysler spent all of 40 days in bankruptcy. A recreational-vehicle dealer, Lazydays, sped through even faster: “We were in and out of [the] Delaware [courts] in five weeks,” says CFO Randy Lay.

The average duration of nonprepackaged, large public-company bankruptcies fell from 944 days in 2008 to 483 days last year, the shortest time in at least 10 years (see “Fast Times,” below). Why are companies exiting Chapter 11 sooner? For one thing, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made it almost impossible to linger in bankruptcy. Among other things, the act reduced the exclusivity period for filing a plan of reorganization, introduced a “hard stop” in the deadline for rejecting an unexpired commercial lease, and limited the bonuses that could be offered to retain key employees while a company restructured.

Also, prepackaged bankruptcies have become more acceptable, thanks to the stingy capital markets and economic uncertainty of the past two years, says Rob McMahon, head of the refinancing group at GE Corporate Lending. Debtor-in-possession financing was hard to find given the difficulties in predicting what the financial markets would be like 6, 12, or 18 months ahead. “So bankruptcy advisers realized they needed to solve the company’s problems before filing, often through a prepackaged deal,” says McMahon.

Given that bankruptcy is a near-death experience for a company, it would seem that the faster a company exits Chapter 11, the better. And, in fact, there are many advantages to shorter bankruptcies. But experts also warn that too much speed poses risk, even to the point of causing a company to plunge into the abyss.

The Quick and the Dead

The biggest advantage of moving quickly in bankruptcy is simply that it gives a company a better chance of survival. Senior secured lenders often have little patience in Chapter 11, especially when they think the debtor’s assets have been dissipated and the business is unsustainable. “In many cases they think they would be better off if the firm were liquidated,” Lay says.

“Those lenders are the 800-pound gorilla,” adds Bill Lenhart, BDO Consulting’s national director of restructuring, “especially if they are providing liquidity through debtor-in-possession financing.”

Any financing is quickly consumed in bankruptcy, says Charles F. Kuoni III of CRG Partners. “If you can exit faster, you minimize the cost of paying all the professionals. That’s a big savings,” he says.

What’s more, with contracts suspended and customers worried about the business’s survival, a dip in revenue is common, points out Laura Marcero, a partner at Grant Thornton. “You get hit from the top line and the expense structure,” she says.

The avg. duration of non-prepackaged, large public-company bankruptcies has plummeted.

While some experts say that fast-track Chapter 11 does not give a company enough time to fix the business, others argue that with a well-defined plan companies can achieve quickly what Chapter 11 was created for — rejecting contracts, exiting leases, selling assets, and negotiating with creditors. “The clock is ticking,” says Jacen Dinoff, chief executive of KCP Advisory Group. Every day a lease is in place, for example, the debtor owes rent, and that cost is considered a priority claim that is paid dollar-for-dollar, says Dinoff.

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