Bankruptcies Now Come Prepackaged

NEW YORK (Reuters) – The days when troubled companies could spend years fixing their problems in bankruptcy court are fast evaporating.

As companies face the tightest credit market in decades, ready-made, pre-packaged and pre-arranged bankruptcies have soared in popularity, spurred along by tougher bankruptcy rules and worried lenders.

“The bias is going to be towards getting in and out of bankruptcy quickly,” said Jerry Mozian, a director of restructuring at consultancy Tatum LLC.

“If it's a small company you really don't want to go in without going in on a pre-packaged basis.”

Moving and relocation services company SIRVA Inc SIRV.PK, for example, used a pre-packaged bankruptcy and received court approval for its reorganization plan this week — just three months after initially going into Chapter 11.

While pre-packaged bankruptcies, in which creditors vote on a bankruptcy plan before it is filed with the court, have been around since the 1980s, the current credit market conditions have made them a much more common form of filing.

While there were only four pre-packaged bankruptcies initiated in all of 2007, this year there were four pre-packaged bankruptcies filed in February alone, according to research firm

Several more pre-packaged bankruptcies have been filed since then, as the tightening of the credit markets has changed the game for a U.S. company seeking bankruptcy protection.

Just a year ago, a bevy of banks, hedge funds and private equity groups were willing to fund a distressed firm or refinance its debt, but today there are few to pick from.

“Liquidity is very tight,” said Roger Frankel, chairman of the creditors' rights and bankruptcy group at law firm Orrick, Herrington & Sutcliffe in New York. “It's not easy to get lenders who are willing to refinance in these markets.”

Exit financing, which paves the way for companies to begin operating under their reorganized business plan, has become increasingly difficult for companies to get.

Auto parts maker Delphi Corp DPHIQ.PK, for example, has struggled with its exit financing for months as financiers backed out of the deal. Specialty chemicals company Solutia Inc (SOA.N: Quote, Profile, Research) had to sue its lenders in February in order to force them to fund its exit financing.

Other troubled companies are hoping they won't get caught in that trap.

“With the capital markets being much more difficult to access, there is absolutely a premium on getting a pre-arranged plan,” Henkin said. “I think that's certainly something we've seen increase.”

Pre-packaged plans allow companies to negotiate with creditors and stockholders outside of court, and save companies millions they would have spent in court on accounting and legal fees.

Pre-arranged bankruptcies in which companies get pre-filing agreements from creditors, who do not officially vote on it, are also increasingly popular, bankruptcy experts say.

“Most debtors feel there is a benefit of not having to go through an expensive bankruptcy process unless they have to,” said Cyrus Pardiwala, U.S. Restructuring Advisory Services leader at PricewaterhouseCoopers PWC.UL.

Instead, Frankel said, indebted companies that would have just refinanced a year ago must use the Chapter 11 process in the courts to get out of debt they can no longer handle.

“If the problem is only that their debt load is too high, that is the perfect set-up for a pre-packaged bankruptcy,” Frankel said.


New bankruptcy filing rules that took effect at the end of 2004 have also helped boost the trend, by forcing companies to come up with their reorganization plans in just 18 months, whereas extensions were much more common before.

“It certainly encourages companies to plan better for their Chapter 11s,” said Michael Henkin, managing director and co-head of the recapitalization and restructuring group at investment bank Jefferies & Co (JEF.N: Quote, Profile, Research). “There's a shorter window to make decisions on leases, there's a limit on exclusivity,” for financing, he said.

Another benefit of a pre-packaged bankruptcy filing is that it allows companies to plan how they are going to get out of bankruptcy before they get into it.

“You have to think about exit strategy going in,” Henkin said, adding that lenders may often be willing to work with companies ahead of their filing because pushing a company into an ill-planned bankruptcy may not be the best solution.

By Emily Chasan

(Editing by Braden Reddall)