The Deal

Liquidation Land

November 7, 2008

By Kevin Fung

Corporate rehabilitation has long been the cornerstone of American bankruptcy policy -- and a matter of real distinction from many foreign practices. But the situation is changing fast. Banks no longer want to lend to bankrupt companies (or anyone else, for that matter); buyers are scarce. As a result, companies are increasingly fading away in bankruptcy rather than regaining their operational footings.

U.S. bankruptcies are starting to resemble administrations in the U.K. More are ending in liquidation rather than reorganization, says William Lenhart, the national director of business restructuring services for BDO Consulting Corporate Advisors LLC, a subsidiary of BDO Seidman LLP, whose 328 active cases rank second among noninvestment banks active for the quarter ended Sept. 30 in The Deal's league tables.

Lenhart says this circumstance is a direct result of tightening credit markets, increasing scarcity of financing and lack of willing buyers. "The economy right now in the U.K. is like a mirror image of the U.S.," he says.

The irony: As the U.S. begins to resemble Britain, other nations gravitate toward the American model.

"Many major countries in the world have started to amend their insolvency laws and tried to create an environment that fosters rehabilitation rather than liquidation," says Thomas Lauria (17 active assignments), the chairman of White & Case LLP's global financial restructuring and insolvency group (791 active cases, first among law firms; roughly 93% of its cases are non-U.S.).

The third quarter was a real spectacle, given the rapid-fire filings of Lehman Brothers Holdings Inc. and Washington Mutual Inc. Those petitions may provide this era its signature cases, although they have a lot of company. About 2,617 corporate filings were made this year through Sept. 30, according to, a 15% increase over the 2,273 for the same period in 2007 and 62% beyond the more than 1,618 filings in 2006. "Right now, the U.S. seems to be six months ahead of the rest of the world when it comes to insolvency," Lauria says. Credit is tightening globally, and seemingly solid foreign companies are starting to find it difficult to obtain financing, he adds.

That spells trouble for China, which only last year adopted its own bankruptcy laws, emulating the U.S. Chapter 11 reorganization model. China's bankruptcy code now recognizes debtor-in-possession as well as postpetition financing for reorganization purposes. But will any lender really take advantage of those new provisions?

Back in the U.S., real estate and retail continue to struggle, with seemingly no end in sight. Most of the bankruptcy filings in the third quarter came from those two sectors plus the financial industry, Lauria says.

And says Mark Minuti (75 active assignments for 18th place among lawyers), a partner at Saul Ewing LLP, the most volatile sectors will continue to be retail and "anything involving the housing market."

Landlord attorneys always top the lawyers' league table -- they often have several assignments for every case, frequently representing several landlords in, say, retail chain bankruptcies.

Now their caseloads are increasing sharply.

Top lawyers Thomas Leanse (482 active assignments, first overall) of Katten Muchin Rosenman LLP (93 cases, 21st among law firms) and David Pollack (357 assignments, a 14% increase, and good for second place) of Ballard Spahr Andrews & Ingersoll LLP (ninth with 192 cases) are staples atop the lawyers' table, but Leanse had 346 cases in the third quarter of 2007, 39% less than he has now.

Pollack had 241 cases for the same period last year, or 48% less. Another landlord lawyer, Kelley Drye & Warren LLP's James Carr, raised his active assignment total 29% to 214 -- the largest assignment increase (48) -- placing fifth among his brethren.

Prominent Saul Ewing, of Philadelphia, has seen its workload jump to 120 active cases (tied for 18th place among law firms), a 15% increase from the second quarter. One reason: Wilmington, Del., where the firm has a strong presence, has narrowly regained the mantle as the most prominent bankruptcy court.

Other bankruptcy districts, such as southern New York and central California, have more cases this year, but Wilmington has attracted eight of the top 20 U.S. filings by asset size, edging out Manhattan with seven.

Three of the four largest retail bankruptcies of the year (Linens Holding Co., Goody's Family Clothing Inc. and Boscov's Inc.) have filed for bankruptcy in Wilmington (Steve & Barry's LLC did so in Manhattan), and only Goody's is trying to rehabilitate itself. Linens is liquidating. Both Boscov's and Steve & Barry's have sold whatever stores they didn't shutter.

Many other retailers right now are holding on until the holiday shopping season, Minuti says, and he predicts even more retailers filing petitions after the New Year.

Lauria agrees, saying the first two quarters of 2009 will cause lots of problems that need to be "flushed out," and not just in retail. The leisure sector, which includes hotels, cruise lines and ski resorts, will see an increase in filings, too, after a rough holiday season, he says.

Traditionally, retailers only truly know where they stand after the holiday season, says Epiq Bankruptcy Solutions LLC's Daniel McElhinney (114 active assignments, fourth among noninvestment bank professionals), who saw his caseload more than double from the 44 active assignments he had in the second quarter. (Epiq's 121 active cases was higher than the second quarter's 115, but it slipped one spot, to fifth, among noninvestment banks.)

Retailers have often waited until after the holidays to file because they at least have some cash in the till. As a result, the decision may not be whether to declare bankruptcy, but whether a retailer will have enough cash to try to reorganize or not, since DIP financing is so difficult to come by. "The real problem is that companies can't get financing to increase flexibility," Saul Ewing's Minuti says. "The economic stimulus packages that the government is employing will take a long time to take effect, which will be too late for many companies."

Troubled companies need to prepare earlier to have more flexibility, Minuti says, rather than react after their cash is gone. He suggests that companies need to hire professionals before bankruptcy is necessary, and develop a plan that can allow more options.

For Traxi LLC's Perry Mandarino, the chief hurdle in managing a debtor to a successful reorganization is finding postpetition financing.

"DIPs are available as long as you have excellent credit and there is collateral, but they'll be expensive," says Mandarino (22 active assignments, third among crisis managers, and a 38% increase over 16 in the second quarter).

The statistics bear him out. Through Sept. 30, the average interest rate for DIP financing has been LIBOR plus 573 basis points, according to That's up 127 basis points, or 28%, compared with the same period in 2007, and 177 basis points, or 45%, over 2006.

Alas, HRP Myrtle Beach Holdings LLC, an operator of a rock music-themed amusement park in Myrtle Beach, S.C., that filed for Chapter 11 on Sept. 24, secured a $2 million DIP five days later that was priced at a staggering LIBOR plus 1,500 basis points.

But while the spotlight seems to shine most brightly on bankruptcies in retail, real estate and automotive, the pain is spreading to other industries, including manufacturing and transportation.

Eric Wilson of Kelley Drye & Warren (26 active assignments, tied for 70th among lawyers) in New York has noticed that in addition to retail, the "middlemen" sectors of manufacturing and goods transportation are having just as much trouble and are a part of the increase in assignments for his firm. (Kelley Drye has 120 cases, tied for 18th among law firms, up from 101 in the second quarter).

While the costs of commodities, including oil, has been declining steadily since the end of the third quarter, Wilson says that up until then, their record highs had created problems for transportation, distribution, storage and freight companies that all rely heavily on fuel. In manufacturing, the skyrocketing prices of raw materials in the third quarter hurt companies, too, he adds.

Epiq's McElhinney says negative economic variables have aligned perfectly at the same time, even though they could have gone one way or the other. He says that the situation right now is beyond prediction.

One bright spot?

Unlike the others, he thinks the worst may have passed on the financing front.

"Up until a few weeks ago, financing was very difficult," McElhinney says, adding that he believes that with the inception of government bailout loans, lenders are beginning to ease up, if only slightly, on providing loans to those with qualifying credit.

Mandarino also sees a gleam of hope ahead. "I think that after the presidential election, we may see certain things start to take a turn for the better, rather than worse."