Name One Successful Chapter 11 Case
About five years into my practice as a bankruptcy lawyer I got into an interesting discussion with my colleagues. The subject? Name one case that you’ve been involved with where the chapter 11 process had resulted in a restructured company that you believed would be a success in the future.
We could all name cases where the chapter 11 process had stripped companies of unneccesary baggage, liabilities or contracts. Cases where the chapter 11 process had resulted in streamlined companies that had a chance to survive. Cases where the chapter 11 process was almost definitely the most economically efficient way to re-allocate resources and dispose of assets.
But to name a chapter 11 case where the company which emerged from bankruptcy had a “bright future?” Now that’s difficult.
The firms below get the biggest, baddest, most complex cases. Their clients are similar to the Big Three automakers. If any of the Big Three do file chapter 11, these five firms are likely to be heavily involved.
What Chapter 11 cases do these firms highlight on their websites?
Weil Gotshal: Enron, WorldCom, and Global Crossing.
Wachtell: Delphi; Refco; Calpine; Northwest Airlines; Collins & Aikman; SunCom; Worldcom; Enron; Kmart; Cable & Wireless;
Skadden: Kmart; National Steel; Comdisco; Delphi; Refco; U.S. Airways; Interstate Bakeries Corporation; Polaroid Corporation; Winn-Dixie Stores;
McLeod USA; Montgomery Ward; Einstein/Noah Bagel Corp; Safety-Kleen Services, Inc;
Service Merchandise Company, Inc.; Singer N.V.; Hayes Lemmerz International, Inc;
US Airways Group, Inc; Washington Group International, Inc.; Winn-Dixie Stores, Inc.; Levitz Furniture Incorporated;
Willkie Farr: 360networks; Loral Space & Communications, Ltd; Air Canada; LTV Corporation; AMF Bowling Worldwide, Inc.; Maxxim Medical Inc.; Ampex Corp.; PG&E National Energy Group; Adelphia Communications Corp.; Petroleum Geo-Services; APS Holdings, Inc.; Safelite Glass Corp.; Value City Department Stores; Woodward & Lothrop Holdings, Inc. (department stores);
Davis Polk: Delta Airlines; Enron; Adelphia; Delphi; Refco; Conseco; Federal Mogul; Loral Space & Communications; Polaroid; Bethlehem Steel; Dow Corning; Owens Corning; JOhns Manville; LTV; McLeodUSA
Not a lot of “winners” among the above companies.
I sense a bit of schadenfreude on the part of the American public when it comes to the Big Three automakers. The American auto industry, labor and management together, made their bed. Now they should lie in it.
But before you utter the words “Let them fail” however, it would be wise to understand what Chapter 11 really means for large public companies.
How has the domestic steel industry recovered? The airlines? Any national retailer that’s filed Chapter 11? The telecom industry, outside of the three incumbant LECs that never filed?
I’m not necessarily down on the Chapter 11 process. I probably still believe that its a more economically efficient than the forced liquidations which have characterized the European bankruptcy system. Probably.
Either way, given history, its hard to be optimistic about Detroit’s future.
Read this article by Richard Mason, one of the nation’s top restructuring attorney’s, about the prospects for a “pre-arranged” Big Three chapter 11 process.
What is the Purpose of Chapter 11?
In my opinion, the purpose of chapter 11 is to give an insolvent company “breathing space” in order to make necessary, economically rational decisions regarding the most efficient use of its assets. Sometimes this is a reorganization. Sometimes this means selling all of its assets to another company.
Almost always, when a company files for chapter 11 it is “insolvent.” Its liabilities exceed its assets. In that case, the equity in the company is worthless and really what you have is management of the company working with its creditors to “recapitalize” the company at a debt level that going forward, management expects that the company will be able to satisfy. Some portion of the creditors might end up being the new owners of the company. Some might get new debt. Some might get very little.
The point being, the chapter 11 process is efficient in that it provides a period of time where the company can keep operating and the creditors of the that company can help/force managment to make the best decisions possible to maximize value.
But generally speaking, no matter how efficiently the chapter 11 process recapitalizes a company, it cannot change the underlying fundamentals of the industry which the company operates. The underlying prospects for that company.
Let’s look at a few examples. First, the telecom industry. During the late nineties, the telecom industry was, in my opinion, poorly deregulated. As importantly, it was poorly deregulated just as the most tremendous innovations since the invention of the telephone were entering the marketplace. A gold-rush mentality ran through the industry and after a few years, you had hundreds of recently formed companies loaded with debt, unsustainable business models and no idea where the industry was going.
Tens or hundreds of these companies eventually filed chapter 11 in the early 2000’s, often more than once. They would file, convert some debt to equity, emerge, file again, convert more debt to equity, emerge again.
Probably, the chapter 11 process as regards to the telecom industry overall was effective. Over the course of about 5 years, a trillion dollars in debt was recapitalized into equity, cash or simply wiped out. Management tried to find niches in which the independent telecom systems which had been built could be efficiently deployed. If they were unable to do that, they sold the assets off to a bigger competitor.
The chapter 11 process eventually led to an industry that was properly capitalized and profitable. It did very little for the prospects of individual companies within that industry.
Steel and Airlines
Now, let’s look at a few more relevant examples: steel and airlines. Like the steel makers and the airlines, the automakers are old school companies weighted down by legacy costs, upstart competitors and bad business practices.
I guess I don’t have enough information to make a determination as to whether the steel and airline industry restructurings were successful. If I recall correctly, the only major, old-line US steel maker that survives is US Steel. That came about through union concessions and industry consolidation. US Steel never filed for bankruptcy, it simply bought the assets of other companies through the chapter 11 process.
US Airways went through two bankruptcies in this decade because it didn’t cut enough debt out the first time to come out properly capitalized.
The Auto Industry
What concessions will the UAW make? I’m not so low on the Big Three as I think others are. I think its important to remember that the bulk of the short term crisis comes not from crappy cars and overpaid union workers. It comes from a 50% drop in cars sales overall. Unless we really are headed into Great Depression: Electric Boogaloo, then sales will rebound. Maybe people will buy smaller cars. Maybe there will be fewer three car families. Maybe. I kinda doubt it though.
Anyway, the point being, it seems like a successful Chapter 11 would not be measured by a companies future success, but by whether or not everyone involved emerged in better shape than had the company simply ceased to exist.
I don’t disagree with this statement overall. My doubts about chapter 11 relate less to the system overall (Europe is slowly adopting a similar system because they think its better than what they have) than to the prospects of individual companies that go through it. The prospects that creditors, including the UAW, will agree to take a big enough haircut to allow a recapitalized Big Three to be “successful.”