The stigma associated with a long Chapter 11 stay often leads debtors toward prenegotiated and prepackaged reorganization plans, offering them the chance to get in and out of bankruptcy in a matter of months. But there's a flip side to these types of plans. Critics of such plans often say that the reorganizing company ultimately ignores its operational issues and often could be right back under the bankruptcy court's thumb again. Case in point: Bally Total Fitness Corp.
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Bally, the Chicago-based operator of a chain of health clubs, submitted
its second Chapter 11 petition in two years on Dec. 3. When it filed
its first bankruptcy, it did so after spending months preparing a
prepackaged plan to go along with the petition it made on July 31,
2007. For example, it already had a commitment for a
debtor-in-possession loan that could be converted into exit financing.
In two months, Bally was out. When it exited under the ownership of
Harbinger Capital Partners Master Fund I Ltd. on Oct. 1, 2007, Bally
claimed that it was a stronger company "with a capital structure that
[would enable it] to increase [its] investments in [its] clubs."
Fast forward just a little over a year later, and it appears Bally may
have been a bit presumptuous. In papers filed late Wednesday, the gym
operator noted that it took substantial financial hits right after
exiting Chapter 11 -- a circumstance it blamed on "a lack of a permanent
management team" and not having a CEO with experience in the fitness
industry.
As a result, the company badly missed the Ebitda projections posted in
its prepackaged plan. Even the financial restructuring carried out in
the plan hasn't left Bally much better off in terms of its total debt
figure. In the months leading to Bally's first filing, it claimed to be
saddled with $827 million in debt. In papers filed Wednesday, Bally
noted that it had $755 million in total consolidated debt (excluding
trade debt) -- just $72 million less than March 2007.
All of which suggests that perhaps even the most efficient workouts aren't the most effective ones.
- Ben Fidler
