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Complicated debt structures have led to a decrease (and maybe extinction?) of prepackaged Chapter 11 filings and, at the same time, more bankruptcy court liquidations, said a panel at the American Bankruptcy Institute's New York City Conference Monday. The panel was discussing whether debtors today are better off selling assets in an auction under Section 363 of the federal bankruptcy code or filing a reorganization plan. "Chapter 11 is inefficient, expensive and a last resort," said Randy Lay at Buccino & Associates Inc. "The difficulty today is so many folks own a slice of the company's liabilities that you don't know who to talk to."
Selling a company as part of the Chapter 11 process isn't desirable, he noted. "When the storm clouds are over a company's head," as Lay put it, is the worst time to sell. Still, all the panelists concurred that may still be the debtor's best option. While deciding the fate of a debtor, the professionals involved must not only be cognizant of the value of the company, but its future prospects within a given industry. "We strive very hard not to have pre-existing notions of what's success and what's failure," said Saul E. Burian at Houlihan Lokey Howard & Zukin. "Instead, you have to find truly the right answer for that company." Consider a failed Internet startup, for example. Its assets may be better utilized as part of a successful company's portfolio, rather than the center of a reorganization plan. And perhaps just as important as a company's realistic prospects of reorganizing is agreement on what it's worth both pre- and post-bankruptcy. "Getting a consensus on valuation really drives the decision to sell or restructure," said Lay. "And I haven't seen many cases where there's a definitive valuation until you're either filing a plan or completing a sale." As a result, the process can be exacerbated by the post-Oct. 17, 2005, changes in the bankruptcy code that are "much more limited in the time in which to demonstrate a forward path for the business." And that forward path, according to Burian, shouldn't be evaluated as a success or a failure by a private equity buyer or debtor's management until at least three or four years down the road. Another reason we might see even more 363 sales? It's simple: "We've got pressure to invest that capital because our investors want a return," said Marc Lasry at hedge fund Avenue Capital Group. --John Blakeley Categories Deal Video
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