Filings are Down
Commercial bankruptcy filings were down by 28% in 2013 over the prior period in 2012, and overall bankruptcy filings dropped 15%, putting the country on the lowest level of petitions since 2007 according to figures released by the American Bankruptcy Institute. The data, compiled by Epiq Systems, Inc. and released by the American Bankruptcy Institute shows there were 3,055 commercial filings in November 2013 down from 4,252 filings in November 2012.
So What’s Up?
With the continued improvement in the economy, this trend undoubtedly will continue. So what does that bode for the world of restructuring professionals? Well, obviously, with the reduced number of filings there is a reduced case load for restructuring professionals to sink their teeth into. However, what is also evident is that with the passing years it seems that the nature of bankruptcy filings have also changed.
While this is somewhat anecdotal, it also appears to be backed up by the data. Over the last several years, the nature and way that chapter 11 bankruptcy filings are being handled has changed. Gone seem to be the days of traditional restructurings where a company filed a chapter 11, worked its way through the issues that caused it to file in the first place, and ultimately filed a plan of reorganization some 9 months to 2 years later, all the while being funded either by the company’s existing lender or by a new debtor-in-possession (“DIP”) lender. More and more cases these days are being disposed of by way of a relatively quick section 363 sale.
The “Quickie” 363 Sale
Below is a graph indicating the trend for the timing of Section 363 sales in large chapter 11 cases (i.e., cases with assets of over $100,000,000). This is based on data published by Professor Lynn LoPucki at the UCLA School of Law. As is clearly observed from the chart, the timeline to conduct a 363 sale from the commencement of the case has decreased from about 350 days in 1980 to under 100 days in 2013, with much of the acceleration coming in the last few years.
Why Is This Happening?
I suggest that the reason for the decreasing timeline is a function of several factors:
Greater judicial acceptance
It used to be that if one brought a sale to a bankruptcy judge in the first 60 days of a bankruptcy case, most of the courts (likely those of outside of Delaware and the Southern District of New York) still considered such a transaction a sub rosa plan. That seems no longer to be the case, and judges seem to routinely consider whether an early sale in the bankruptcy is viable based on the merits of the case. Presumably no small amount of this changed judicial attitude derives from the blindingly quick sale in the General Motors bankruptcy case.
Availability of capital (or lack thereof)
Private equity groups, hedge funds, and other specialty DIP lenders seem no longer to be interested in the long-term turnaround that a chapter 11 reorganization offers. Rather, they deploy their capital, often on a secured interim DIP financing basis, with a view towards becoming a credit buyer in a follow-on transaction. This makes much more sense for these capital providers, since the timeline is far shorter and the certainty of the outcome greater. In the absence of long-term DIP financing available to chapter 11 debtors, the only means to a reorganization is a 363 sale free and clear of the liabilities—leaving it to the remaining creditors to fight over the scraps of proceeds from the sale after repayment of the DIP lender and other required obligations to be paid on closing.
Cost of reorganization
The lawyers and other restructuring professionals may have outdone themselves in the last several years with the increasingly enormous cost to turn a company around in a traditional chapter 11. We all know that it takes a bevy of professionals to properly restructure a company: lawyers, accountants, turnaround professionals, valuation professionals, and various others. The cost of these professionals working away month by month for a year or two during a bankruptcy case simply makes this alternative untenable. On the other hand, a quickly structured section 363 sale occurring within the first 60 or 90 days of a bankruptcy case substantially reduces this cost. While it is true that professional fees will continue well after the sale, during the liquidating case until either its dismissal or a confirmation of a liquidating plan, the post-sale cost is substantially reduced.
So, it seems that with this change in economy and the change in the chapter 11 process, restructuring professionals are going to have to learn to reshape themselves, as they have preached for decades to the clients they advise.