The market for Encompass Services bank debt tumbled from the 30s into the 15-20 range immediately after the company filed for bankruptcy last Tuesday, but recovered somewhat with bids in the 20s after rumors that bank debt holders were looking to liquidate the company were quashed. No bank debt paper was seen trading last week. "Liquidation in the traditional sense of the word was not coming off of anyone's lips," said Michael Gries, chief restructuring officer for Encompass.
Whatever was coming off people's lips Tuesday, it was enough to cut bids for the bank debt in half (LMW Web site, 11/19). Gries explained that the banks were concerned with the large size and risks of the geographically expansive company and would like to see the company trimmed down. One source familiar with the bank debt holders thinking concurred, commenting that a paring down, rather than a full-blown liquidation, was what banks were squawking about. "There was a feeling among some of the lenders that the company was too big, that they didn't have the ability to operate given the size," he said.
Encompass Services, which is made up of 150 companies rolled into one, will look to sell off businesses to become a smaller, more focused and less risky company. "It will be leaner and meaner as so many businesses try to do going into Chapter 11," he said. Encompass has already sold 16 of its businesses.
A month ago, the company announced that it would pursue a prepackaged bankruptcy plan, which would have rolled Encompass' existing $600 million in bank debt into a new $200 million term loan and the remaining amount would have been converted into an 80% equity stake in the reorganized company. But the company was not able to get the required number of votes from lenders and bond holders and chose to file for Chapter 11 rather than pursue another exchange offer. "There was a distraction to the business itself," said Gries, explaining how the pursuit of another exchange would affect Encompass' customers, vendors and employees. Responding to claims that the company had to file for bankruptcy because it lacked the cash to continue, Gries said, "We have plenty of cash. We are only going to use it judiciously."
Encompass has secured a $60 million debtor-in-possession facility via Bank of America, J.P. Morgan, and GE Capital. Its pre-petition bank debt is led by B of A. J.P. Morgan is the syndication agent on that deal and First Union is the documentation agent. Bank officials and a Wachovia Securities spokeswoman declined to comment. B of A and J.P. Morgan spokespeople could not be reached by press time. The company is looking to file a plan of reorganization before year's end and would like to emerge sometime in spring 2003. "