VideoBankruptcy 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.
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.
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