Ever-shorter U.S. bankruptcies have creditors scrambling

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By Tom Hals | WILMINGTON, Del.

WILMINGTON, Del. Financially distressed
companies that file for U.S. bankruptcy are emerging from court
proceedings more quickly than ever, lowering legal costs but
also forcing junior creditors to scramble to protect their

In 2016, the average Chapter 11 case took 7.3 months, the
quickest ever and less than half the average in 2013, according
to data compiled for Reuters from Bankruptcydata.com, which
monitors public company filings dating back to 1990. Since then,
the median case length was 16.1 months.

Legal strategies, such as prepackaged bankruptcies and quick
auctions, and the increased role of hedge funds have transformed
Chapter 11 from the 1990s, when companies such as discount
retailer Bradlees spent years protected from creditors.

“It used to be a roach motel,” said Melissa Jacoby, a
professor at the University of North Carolina School of Law. “If
anything, the worry now is some cases go too quickly.”

For example, it took just four business days for vodka maker
Roust Corp, which owns the Russian Standard brand, to get a plan
approved last month in one of the shortest cases ever. The
company was stung by the sharp fall in the Russian rouble last
year and spent nine months hammering out a prepackaged
bankruptcy plan with noteholders to cut $462 million in debt.

By the time it filed, everything was done but court review.

Last year there were 11 prepackaged bankruptcies, the most
ever, according to a database of public company filings since
1979 maintained by UCLA Law School professor Lynn LoPucki.

Prepackaged plans limit risk and curtail the fees charged by
lawyers and other professionals, which often top $1,000 an hour. The strategy works best when a company’s plan affects a small
number of creditors, but is less successful when companies need
to cut debts to a large number of suppliers or landlords.

In those cases, quick auctions have shortened the length of

Auctions of public companies in bankruptcy went from being
the exception in the 1990s to nearly half of all cases by 2015,
according to LoPucki’s data.

For example, RadioShack auctioned about 1,700 stores as a
going concern just 39 days after filing for Chapter 11 in 2015.

Legislative changes in 2005 have forced retailers to quickly
select which stores to close, shortening their bankruptcies.

Faster Chapter 11 proceedings also have been driven by hedge
funds, which increasingly have replaced banks as senior
creditors. Banks were more tolerant of drawn-out proceedings
because they wanted to reorganize companies so they could take
on loans. Hedge funds care more about maximizing investment
returns, which can often mean a hastily arranged auction.

As a result, unsecured creditors need to find alternatives
to ensure they are not short-changed, said Sheon Karol, a
managing director with The DAK Group advisory firm.

Creditor strategies include trying to delay an auction,
easing bid requirements or challenging a lender’s control.

Unsecured creditors of electric car maker Fisker in 2014
convinced a judge to roll back a lender’s control over its
auction. The moved attracted a Chinese bidder and the sale price
rose six-fold from an initial bid.

However, that kind of success is rare. The American
Bankruptcy Institute, an industry organization, in 2014 urged
legislation to prevent most auctions within 60 days of filing.

Restructuring veteran Jack Butler, chief executive of the
Birch Lake Holdings merchant bank, said the pressure for shorter
bankruptcies will continue. “Although I’m not sure it can get
any shorter,” he added.

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