ANNEX V : WHEN TO RE-ORGANIZE UNDER PROTECTION OF
BANKRUPTCY LAWS
The word bankruptcy used in relation to business is much
misunderstood by the general public. Seeking protection from creditors
for the purpose of gaining a respite to reorganize the company's affairs
under the US Bankruptcy Code (or bankruptcy and insolvency legislation
of other jurisdictions), is very different from declaring final bankruptcy,
throwing in the towel and ceasing operations. In recent times many
companies, including multi-billion dollar corporations, have sought the
protection of Chapter 11, and eventually emerged from bankruptcy
proceedings as viable enterprises.
However, as GE Capital notes, a well known
ABL lender to distressed companies,
bankruptcy is a complex and often emotional subject.
Actually, GE Capital and other specialized lenders provide capital
(usually in the form secured asset financing, i.e.
ABL) to companies that obtained
the protection of Chapter 11. This is often referred to as
DIP financing. Liens associated
with this type of financing rank higher on new assets then pre-existing loans.
The reasons why a corporation may seek to reorganize its affairs
under the protection of bankruptcy laws are many, but they generally may be
summarized as follows :
-
the company is continuously losing money, and is expected to
continue to lose money because of large contracts that compel
unreasonably high expenses (e.g. leases), or that compel
unreasonably low revenues (e.g. long-term supply contracts); these contracts may have been
very reasonable when they were made – this is not the point; I use the
word "unreasonably" in the sense that these contracts are
unsupportable in present and
foreseeable market conditions,
-
the company has other unsupportable long-term obligations because
of litigation, environmental claims or the like,
-
the company has serious liquidity problems because of lack of cash
or its inability to refinance long-term debt obligations on
acceptable terms.
Needless to say, a bankruptcy filing under Chapter 11 may not be
necessary if an amicable restructuring arrangement can be reached with
key parties, particularly old and new lenders, and we often negotiate such
arrangements. In so called workouts, we may – without resorting to
bankruptcy – arrange new financing that is a
DIP financing in all but
name.
Actually, an amicable Chapter 11
filing is also possible under a "prepackaged
bankruptcy", whereby the troubled company, its old and new lenders, and
suppliers agree to the proposal for restructuring the company's
obligations in advance. When required, we arrange new financing and negotiate a
deal that is palatable to all old and new stakeholders.
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