A year after the new bankruptcy code was introduced to cut costs and accelerate bankruptcy proceedings, market practitioners expect more debtors will choose prepackaged bankruptcies rather than ride through the process of restructuring under the new code. In prepackaged bankruptcies, or prepacks, constituents agree on a restructuring plan before the company files for bankruptcy, thus accelerating reorganization.
The new bankruptcy law was introduced Oct. 17, 2005, with the goal of curbing the length of time and the cost of Chapter 11 bankruptcy cases. Under the old plan, debtors had an exclusive right to file a plan during the first 120 days after the start of the bankruptcy case and had 180 days to obtain acceptance of the plans. This was often extended, as in the case of United Airlines that was in bankruptcy for three years. It emerged from Chapter 11 last February (CIN, 1/13). Under the new code, the debtor's exclusive period to file a plan may not be extended beyond 18 months and acceptance of that plan cannot exceed beyond two months after that.
Some are skeptical, however, that debtors will be able to restructure within the 18-month timeframe, thus leading for the need of pre-packs. Alan Miller, senior counsel at law firm Weil, Gotshal & Manges and senior advisor at Chanin Capital Partners, said the provision can destroy value. "Experience tells us businesses need longer than 18 months," said Miller. "If a debtor needs longer than 18 months to fix the business, then to force it to file a plan, regardless of where the business is, is just plain arbitrary."
Geoffrey Raicht, a partner at law firm Sidley Austin, agreed. "The exclusivity period is one of the reasons prepacks are more attractive," he said. "Companies are encouraged to pre-negotiate. If you have a prepack you are going to save on administration costs." Under the new code the debtor has to carry more costs, such as making payments to trade suppliers, paying deposits to utilities to keep services in operation and paying increased legal fees.
Creditors Smile
Prepacks are also welcomed by creditors seeking to preserve the value of a bankrupt company's assets. Despite being aimed at curbing costs, some say the new bankruptcy code is still costly and can reduce value. "It is more expensive to file for bankruptcy now than a year ago," said James Harris, president and founder of Seneca Financial Group. He agreed creditors prefer prepackaged bankruptcies because they stand more to gain. "Creditors would like to do prepacks. It allows them to get control of a company. They don't see debtors expending so much money. Creditors want control to get value in their interests," said Harris.
Blue Bird Corp., a maker of buses and motor homes, is one example of a company that opted for a prepackaged bankruptcy under the new code. Peter Spratt, senior managing director and president of PricewaterhouseCoopers Corporate Advisory and Restructuring, said the company was in and out of bankruptcy in 32 hours one of the fastest turnarounds ever. Blue Bird restructured through a pre-packaged court filing in the United States Bankruptcy Court, District of Nevada, in January. A Blue Bird spokesman did not return calls seeking comment. "Prepackaged bankruptcies are on the increase. You will see more planning of the end-game much earlier," said Spratt.
