One of the principal ways creditors are delaying company exits is by disputing the debtor's valuation. With the economy recovering, "if the advisers do a valuation at one point in time and then begin creditor negotiations, debt that is still trading may increase in value," Marcero says. Constituents out of the money in the initial reorganization may claim to be deserving of a recovery. Trading of claims while the company is in Chapter 11 can also throw a wrench into the process, as new noteholders enter in the middle of negotiations.

"Any time you're in the process of Chapter 11, changes in the economy are going to impact the value of the business in bankruptcy, although the relationship is not linear," says Tim Cummins, a managing director at Stout Risius Ross. Valuation models are the same in bankruptcy, but there's plenty of room for disagreement. "In valuing a company that has a difficult road ahead, a discounted cash-flow analysis, for example, is complex. At what point can they expect to be cash-flow positive?" Cummins says.

One thing management can do to avoid lengthy battles with unsecured creditors is to emphasize the relationship going forward. "If the creditor is receiving something on the dollar for its old payable but will also continue as a supplier, that may be a good deal," Kuoni says. More broadly, getting on the same page with creditors is key, Lay counsels. "If you don't establish a very good relationship with the creditors' committee up front, that causes a lot of squabbling over the ultimate reorganization."

Slowing Down
It's possible, though, to go too fast. With a prepack, for example, the company may address its balance sheet but not thornier problems, leading to a second bankruptcy in short course, says Jonathan Carson, managing director of Kurtzman Carson Consultants, a noticing agent.

Also, accelerating a bankruptcy process usually means compressing administrative milestones, like the deadlines for creditors to file claims and for companies to mail ballots. "The more you compress, the more difficult it becomes logistically," Carson says. For large companies with tens of thousands of claimants, it may be impossible to comply with requirements in short time.

But perhaps the biggest risk in a fast bankruptcy is in not getting all the value that Chapter 11 can offer. "The court and the debtor look to maximize the value of the estate," says Christopher Meyer, a partner at Squire, Sanders & Dempsey. "If I can take a more measured route and get greater value — and not lose so much in the meantime — then I'll want to do that."

"'I'm giving up my assets for less than their worth because everybody knows I need to sell them' — that's what you worry about," says Lay. "Am I getting the right value for this business?"

More time may be advisable, for example, when trying to get the best price for assets in a so-called 363 sale. "If you have unanimity on the part of the management, the board, and creditors that this is a decent business, you can buy some time to get the best deal," Lay says. "You must convince creditors that they won't get the value they want if they force the company into an unnaturally quick liquidation."

Avoiding the courts is still, in many cases, a preferred method for restructuring. Since 2005, out-of-court deals have become popular again, Dinoff says. "I do believe with the changes in the code creditors have gotten a lot smarter about the risk of Chapter 11," Dinoff says. "They're more willing to take a settlement outside of bankruptcy."

Ultimately, however, time is not on the side of a business in Chapter 11. "I'm hard-pressed to say there is any benefit to prolonging [a bankruptcy] case — you run the risk of the judge not being very happy with you," Kuoni says. "If you can't fix the operation in six to nine months, or at least get it profitable, maybe you ought to look at liquidation."

Vincent Ryan is senior editor for capital markets at CFO.

• « previous
• 1
• 2

LinkedIn Company Connections:

• United Airlines |
• Chrysler |
• GE |
• KCP Advisory Group |
• Lazydays |
• BDO |
• CRG Partners |
• Grant Thornton |
• Stout Risius Ross