Going BK twice
Debt woes spur repeat bankruptcies, experts
say
By Dena Aubin
NEW YORK, June 5 (Reuters) - It has become all to common in the last year to see ailing companies
head to the bankruptcy court for rehabilitation.
But a disturbing trend is that one out of every three companies are making repeat trips to bankruptcy
court as still-heavy debt loads cripple their attempts at a recovery, bankruptcy experts said.
And, instead of amendable bankers participating in workouts,
waiting in the wings are investors in distressed debt, driven by
their hunger for quick gains. Bankruptcy experts said these
investors are working against the process of rehabilitating
these sick companies.
``We have had an enormous revolution in the concept of
bankruptcies and reorganizations,'' said Harvey Miller, a
senior partner and head of the bankruptcy and reorganization
practice at New York law firm Weil Gotshal & Manges.
While the original concept behind the U.S. bankruptcy code
was to allow companies to reorganize, primarily to save jobs
in the wake of the Great Depression, now another goal is to ``maximize returns to creditors,'' he said.
Miller, whose firm has worked on bankruptcy cases including Federated Department Stores (NYSE:FD -
news), PennCorp Financial Group and Southland Corp., made the comments at a press briefing here
sponsored by Glass & Associates, a restructuring firm.
Traditional banking relationships, where a single bank worked with an account, have disappeared as banks
increasingly liquidate troubled loans, selling them to a new set of investors with short-term objectives, he
said.
``It changes the whole dynamic of the negotiating process,'' Miller said. Distressed debt investors in some
cases have pressed companies to quickly emerge from bankruptcy, even if they continued to lose money,
he said.
MANY COMPANIES BEYOND HELP
Miller said he has seen an increase in both repeat Chapter 11 filings and liquidations.
Many companies have such severe operational problems ``that rehabilitation is probably beyond the
capacity of the company,'' he said.
About 33 percent of companies that filed for bankruptcy in the 1980s and 1990s have ended up in a
repeat Chapter 11 or an out-of-court restructuring, said Stuart Gilson, a professor of business
administration at the Harvard School of Business.
One contributing factor may be that companies do not shed enough debt when they reorganize, Gilson
said.
Troubled companies typically have a debt-to-asset ratio of about 90 percent when they file for
bankruptcy, and most reduce to only about 60 percent when they emerge from bankruptcy -- about twice
the average for industrial companies, Gilson said.
``The good news is that Chapter 11, for various reasons, gives them a cleaner start than alternative
options,'' said Gilson. For companies that try to restructure out of court, ``debt hardly changes at all,'' he
said.
Despite the risks, the business of restructuring sick companies is catching the attention of major Wall
Street investment banks, said Mitchell Drucker, national restructuring manager for the CIT Group Inc.
(NYSE:CIT - news), a commercial and consumer finance company that provides loans to troubled
companies.
Drucker said competition is intense, especially for the business of lending to relatively low-risk companies
with solid assets or business value.
In the telecommunications sector, by contrast, few lenders are willing to put money at risk, ``so those that
do tend to command high rates,'' he said.
Mitchell said his firm finds restructuring opportunities by tracking a list of companies that issued junk
bonds in the late 1990s.
Lax lending standards during the boom years of 1997 and 1998 are a key reason default rates are likely to
soar to 10 percent by early next year, according to Moody's Investors Service.
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