Expedited bankruptcy restructurings continue to seem more like the rule than the exception for struggling companies as the economy continues to search for a robust recovery. However, a survey from ratings agency Standard & Poor's (S&P) suggests many of these rush Chapter 11 restructurings more likely equate to risky quick-fixes than true repair or restructuring jobs.
A new study by S&P, Bankruptcy Financing Isn't What it Used to Be, poses the question of whether a faster bankruptcy proceeding -- usually in the form of a "pre-pack," prepackaged/prearranged deal in which key creditors agree to terms before the restructuring plan is officially filed -- is necessarily a more effective one. S&P suggests that is not the case, and a fast, seemingly successful entrance and exit from bankruptcy on the part of many companies could be "short-lived."
"In our view, many of the companies that have emerged from bankruptcy following quick-fixes may be vulnerable to another downturn," said the report spearheaded by S&P's Olen Honeyman. "Certain of these restructured companies may remain highly leveraged or have significant unaddressed operational issues. We believe these entities may be candidates for serial restructurings if their revised debt structures prove to be too onerous." S&P added that a failure by companies to address key existing problems in their struggling operations could ultimately decrease recovery prospects for creditors and promote long-term credit-rating damage.
S&P points out lighting and ceiling fan manufacturer Generation Brands and auto-wheel producer Hayers Lemmerz as companies that emerged quickly from bankruptcy, but with significant high leverage and credit risks. Both are targeted among many as "highly susceptible to another downturn, particularly if a double-dip recession comes to pass."
Brian Shappell, NACM staff writer
(Editor's Note: See much more on this topic in the upcoming May issue of Business Credit Magazine).