'Whistling by the Graveyard': Why Restructuring is Preferable to Bankruptcy
The number of business bankruptcy filings has been on a steady decline since 2009, according to the Administrative Office of the U.S. Courts. Filings in the U.S. were 45.4 percent less in 2013 than in 2009 and 17.1 percent less in 2013 than in 2012. The downward trend in Missouri filings has closely followed the four-year national trend, decreasing by 46.3 percent from 2009 to 2013. Filings in the first quarter of 2014 continue to trend down in Missouri and nationally. While economic recovery is a likely factor, successful restructuring efforts may contribute to the trend.
At Brown Smith Wallace, we have seen first-hand the importance of early involvement of an adviser in distressed company situations. Recently, we consulted with two companies that ultimately ended up in bankruptcy, but their paths and outcomes contrasted greatly. In one case, our Transaction Advisory and Litigation Support expert was on board with sufficient time to help the company get its financial house in order. We made money-saving recommendations to reduce the debtor-in-possession financing needed. Unfortunately, bankruptcy was unavoidable, but we were able to help execute a pre-packaged section 363 asset sale, working in conjunction with the Bank and Debtor Counsel only 60 days after filing. In a contrasting case, we were hired three days before the Chapter 11 filing and then spent the next 26 weeks working as an adviser for the company until it could be sold. Both cases resulted in successful outcomes but the cost of a 60-day process versus a 26-week one was a significantly cheerier outcome for the more proactive client.
Bankruptcy filings are stressful, costly, require a lot of court oversight to get the simplest business decisions approved and take much longer than originally planned to reach an outcome. Being alert to red flags earlier in the process certainly is important in managing problematic loans to prevent bankruptcies. Most companies typically will stretch all their other vendors in an effort to not fall behind on loan payments because lender consequences can be much more severe than having a vendor hold a shipment or two.
Without proactive and diligent financial performance monitoring, the lender may be the last to know when a debtor is heading toward a bankruptcy situation. Ironically, delaying detection or procrastinating in hopes that the business gets better only aggravates the problem. Hiring a skilled operational and financial professional to assess the situation early on may help detect the problem sooner and improve the likelihood of finding restructuring solutions, which could reduce costly fees and the risk of having to file for bankruptcy protection in the first place.
Accelerating the Restructuring Process
Once you recognize the problem, you can accelerate the restructuring process by bringing in an independent business adviser who will work on behalf of the distressed company to proactively communicate and work with its current financial institution or new financial institution to restructure the debt; analyze the various assets and loans that could enhance liquidity; and aggressively implement and monitor operational and financial cost improvements. If the adviser is backed by a full service advisory firm, he can employ forensic accounting techniques to determine if fraudulent transactions have contributed to the problem, provide risk management and insurance advisory services, and even perform bookkeeping and tax reporting functions.
If it’s too late and a bankruptcy filing (reorganization or liquidation) is inevitable, the restructuring professional may have the resources to assist with the preparation of the various reports required by the bankruptcy court at the time of filing and on a monthly basis. These forms are different from your typical income tax return or financial statement and require a lot of in depth reporting and analysis to appease the court and the credit committee. They are not something a company’s accounting staff has the time or knowledge to do.