Strategic bankruptcies may be less attractive for companies, thanks to the new bankruptcy law, according to Moody's Investors Service. Northwest Airlines, Delta Airlines and Delphi Corp. all filed for bankruptcy while the companies still had enough cash to carry on operations for a significant period of time. The ratings agency said that while companies in an industry may choose strategic bankruptcies, they have been most prevalent in the airline, auto and auto parts industries. Michael Mulvaney at Moody's said it is too early to define the specific situation around Dana Corp., which filed for bankruptcy on March 3.
For industries where product liabilities or pension liabilities pose a significant potential claim on the company's assets and earning capacity, a bankruptcy filing may be an effective way for preserving enterprise value and protecting against those liabilities. Additionally, when restructuring decisions may hurt creditors, companies may choose to make decisions during bankruptcy when court oversight may provide them with legal protection.
But Moody's said that certain changes in the bankruptcy code could make strategic bankruptcy filings less attractive. The changes include restricting the time period during which a company has an exclusive right to file a reorganization plan and placing limits on key employee retention programs.
"Indeed, if the company is or has risk of losing the exclusivity to restructure, that is an important consideration," Mulvaney said. "Management teams and boards would like to drive their own restructuring plan and the future of the organization, and there is a risk under the new code that they might not be able to get the extensions they [might want]. That is a relative risk for any company thinking of strategic bankruptcy."