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A Comeback For Prepacks?
Bankruptcy professionals believe the change in tack these days is tied to an alteration in bankruptcy law made in 2005 shortening the exclusivity period a company has.
March 17, 2008
Companies petitioning for bankruptcy protection are increasingly turning to prepackaged bankruptcies, a tool used by practitioners of the restructuring trade for more than a decade. These “prepacks,” as they are known, likely will gain popularity because of changes in bankruptcy law.
“More and more, you are beginning to see companies recognize that traditional Chapter 11 bankruptcies are a thing of the past,” says Jay Goffman, a partner at Skadden, Arps, Slate, Meagher & Flom. “They’ll do a prepack or a 363 sale,” he says.
Bankruptcy professionals believe the change in tack these days is tied to an alteration in bankruptcy law made in 2005 shortening the exclusivity period a company has. As a result the hurting business has less time to put into action its own restructuring plan before someone else can impose a different plan on it. Also, companies have less time to figure which properties they will keep leasing because of changes in bankruptcy law.
The latest crop of bankruptcy petitions with a prepackaged restructuring include media company Ziff Davis and SIRVA, best known for its moving business, Allied Van Lines. When Sirva petitioned for bankruptcy protection it had $924.5 million worth of assets and debts of over $1 billion. The company says in court documents that it was undone by the housing crisis. Not only did the company earn fees from moving families, it actually got involved with the sale of homes. When it filed for bankruptcy in the Southern District of New York, SIRVA revealed that it had come to an agreement with its secured lenders after “arduous and productive negotiations.”
A prepackaged bankruptcy often is pre-negotiated. Creditors vote before the actual filing and then the votes are used in the bankruptcy to support the plan. In some cases, debtors will get lock-up agreements in which the creditors say they will vote for the plan even though they have not actually voted for the plan. There are some risks to lock-ups because creditors backing the plan are not allowed on a creditors’ committee.
“After the 2005 changes [in bankruptcy legislation] a lot of companies have a sale teed up or a liquidation or a prenegotiated settlement with primary constituents,” says Bill Lenhart, of BDO Seidman. “Many companies try to work out deals before the filing and used the filing as a way to finalize the deal. It is easier to have it blessed by the bankruptcy court.”
The notion of a prepack is not a new one. The first one for an operating company was done in the early 1990s in the restructuring of Memorex Telex, according to Jay Goffman, a partner at Skadden who served as debtor’s counsel in the case.
“We started this with Memorex Telex,” recalls Goffman. “These vendors will get paid back prepetition money they are owed as long as they keep providing services and goods and prepetition prices and terms.”
As Lenhardt sees it, the prepackaged bankruptcy “makes a lot of sense for prepetition secured lenders to have the deal in place.” However, the BDO Seidman executive notes, “the problem is how you treat the balance of your unsecured creditors such as vendors an employees. In most cases these creditors just get rolled over,” meaning they keep getting paid while the business is under court supervision.
A prenegotiated restructuring does not always ensure that a business is fully retooled. Some companies even fall back into bankruptcy court because a prepack can paper over deeper problems. “Prepacks are not always effective in how they repair the company,” says Lenhart. Lenders accepting different terms “may be good but [it is] not everything.”
For example, a deal hashed out within the last six or nine months may be tested by higher oil prices that have seeped into every aspect of the US economy. Also, many prenegotiated plans likely could not have considered how quickly the US economy’s growth has slowed and how that impacts a business’ revenues and profits.
“The company that feels they only need a balance sheet fix rather than an operational [restructuring] could be a [Chapter] 22,” warns Brad Erens, a partner at Jones Day who oversees restructuring in Chicago.
There are other trip wires to a prepackaged plan.
As Jeffrey Manning with Trenwith Group sees it, “I have always thought that the prepack is a misnomer because you cannot [always] get all the constituents together and there is always somebody that can hold you up.”
According to Manning, there are investors who can buy “positions to upset prepacks. These investors buy claims and declare holy war against the prepack. They can extract a larger sum,” he says, adding that “generally parties of a prepack have a vested interest to see it move forward and have a lot to lose if it does not go forward.”
That said, there are some notable success stories when it comes to businesses that have gone the prepackaged bankruptcy route.
For example, the school bus manufacturer Blue Bird spent 32 hours in bankruptcy. The company used the restructuring to give it breathing room to get itself back on its feet. Six months after its bankruptcy, an affiliate of Cerberus Capital snapped up the bus maker. “It was going to be either liquidated or confirmed in one day,” recalls Goffman, who served as debtor’s counsel on the case which unfolded in a Reno, Nevada, court.
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