Turnaround and Performance Improvement Advisors

Many operating companies in a liquidity crisis have been unable, in the current economy and credit environment, to refinance debt and/or meet working capital needs. The affect trickles down as payables get stretched and greater risk is assumed with critical vendors. Troubled businesses have and are struggling to raise financing for turnaround initiatives or to continue same. Traditional restructurings under the Chapter 11 process have been difficult, with section 363 sales and liquidations more prevalent during the last three years.

In the last 12-18 months Chapter 11 filing activity has been lower than expected, and in the current market there have been more out of court restructuring solutions and pre-packaged or pre-negotiated bankruptcies, along with forced liquidations and foreclosures.2009 Chapter 11 filings reached record levels due to tight credit markets, decreased consumer spending, higher unemployment and lower consumer confidence. In spring 2010 improved credit markets and “amend and extend” actions produced fewer Chapter 11 filings. A recent Bank of America Merrill Lynch report said that 60% of proceeds from US high-yield bond issuance were used to refinance existing debt to alleviate liquidity pressures. These refinancings have not “fixed’ companies operating problems, rather they have moved the problem to the future. Therefore, the US corporate-default rate is expected to drop to 4%-5% by end of 2010 versus 13.7% in 2009.Traditional Chapter 11 reorganizations remain relatively low due to continued tight credit markets and scarcity of refinancing or debtor-in-possession financing opportunities. Borrowers and lenders have turned to out-of-court restructuring and liquidation solutions, including UCC Article 9 sales, assignment proceedings and receiverships; and Chapter 11 filings on a pre-packaged or pre-negotiated basis, to save time and cost. Recently the only entities typically able or willing to supply DIP financing are debtor’s pre-petition lenders and acquirers in section 363 transactions.

Traditional Chapter 11 Planning

Nonetheless there remains a place for traditional Chapter 11 restructurings if all parties agree with the goals/plans and particularly if use of cash collateral can be utilized. To do so require intense advance planning, careful determination of timing of disbursements related to a filing and marshalling of resources to fund cash requirements. Debtors seeking to determine how best to deal with a liquidity crisis should carefully review their actual and planned cash flow details and seek the advice of both qualified bankruptcy counsel and turnaround advisors.Chp 11 Planning – Timing

  • Operating cash flow peaks – seasonality (as it relates to use of cash collateral); ensure adequate cash for initial costs such as funding retainers, adequate assurance payments, expenses until motions filed and approved of payroll and customer deposits, returns, refunds ordersRent payment timing (unpaid rents at date of filing) and court decisions on partial month rent payments (stub rents, from filing date to end of first month in bankruptcy)
  • Credit card continuity and adequate assurance of bad debt inherent in portfolio held by service provider (alleged bad debts in portfolio and incurred in future credit sales during the case)
  • Utilities, adequate assurance of services post filing
  • Preferences – vendor and other payments before a filing date
  • Lease termination timing in existing portfolio
  • Status of taxes (sales and other tax payments and timing, obligations, delinquencies)
  • Payroll payment dates; leased employees; benefits continuation
  • Employee maximum priority for wages, salaries and commissions is $10,000 and applicable pre-petition time period for calculation of this item is 180 days
  • Debt principal and interest payment amounts and due dates
  • Other contractual payment amounts and due dates including previously negotiated settlement agreements struck before the Chapter 11 filing date
  • Composition of inventory needed to conduct business post-filing and impact of bankruptcy (floor plan arrangements, consignment goods)
  • Projected weekly cash flow – the TWCF budget (must adequately provide for critical advertising, purchased services, supplies and merchandise, critical vendor payments and reflect likelihood of reduced or no trade terms post filing)
  • Post emergence structure, the pre-packaged tactic most prevalent but in any event the pre-filing planning process should address the exit structure and distributions

Other Issues to Consider:

  • Time to assume/reject leases – limited to 120 days plus one 90 day extension; no further extensions without the lessor’s consent
  • Time limit – exclusivity period limited to 18 months from filing date; further the time period that the debtor has to obtain acceptances of a plan may not be extended beyond a date that is 20 months after the bankruptcy filing
  • Administrative claim granted to vendors that delivered goods to the filing entity within 20 days of the filing date; these claims must be paid in full to get a POR confirmed
  • Reclamation – right of reclamation applies to good received by debtor within 45 days prior to bankruptcy and seller has until 45 days after receipt of goods to make a reclamation demand, if a bankruptcy is filed before the 45 days expires the reclaiming seller has 20 days after commencement of the case to demand reclamation in writing. There are other reclamation issues such as payment, adequate assurance and verification of whether reclaimed goods were on hand at the time the reclamation demand was received by debtor
  • Makeup of unsecured creditors committee and their representation
  • Existing senior lender position on DIP loan and debtor’s use of cash collateral
  • Adequate protection if debtor’s seek and obtain court approval for use of cash collateral – requires debtor’s to propose some form of relief that will preserve the secured creditor’s interest in the collateral securing the debt, pending the outcome of the proceeding; adequate protection is a means to protect a secured creditor from being deprived of the benefit of its prepetition bargain; when adequate protection is required section 361 of the Code states that it may be provided by making periodic cash payments to the secured creditor, granting the secured creditor an additional or replacement lien on other property of the debtor, or granting the secured creditor such other means of relief so that the secured creditor will realize the equivalent of its interest in the property• Profit proceeds from augmentation, if any, in full or partial liquidation
  • Position of pre-petition creditors on consignment goods sold post petition, recovery of actual inventory, recovery of sale proceeds
  • Critical vendors and related financial and filing