The number of prominent IP lawyers in New England has plummeted due to the recession. Earlier, law firms assumed IP holders would want patents and would pay for them no matter how rough things got. Due to the lack of financing for startups, this is no longer the case. Students studying IP law who currently have PhD’s have the easiest time finding work. Summer associate offers have plummeted.
In 1983, when Charter Company filed bankruptcy, the $1.8 billion conglomerate with more than 180 subsidiaries shocked the nation. By hiding pending debt maturities in unconsolidated subsidiaries, Charter was able to fool investors until it was too late. Twenty-six years later, the Charter bankruptcy has been dwarfed by the bankruptcies and restructurings of financial conglomerates such as AIG, Lehman Brothers, and CIT. CIT, with over $60 billion in financial assets was the latest victim of the financial crisis. If the firm hadn’t waited until November to file, thousands of merchants would have not been able to finance their inventories before the 2009 holiday season. CIT is the fifth largest company by assets to enter bankruptcy. After agreeing to a prepacked bankruptcy process, investors will receive 70 cents on the dollar in the form of new senior debt and equity in the reorganized firm. If the company has been allowed to fail like other financial institutions, unsecured claims would have received less than 10 cents on the dollar.
Fred Hodara of Akin Gump Strauss Hauer and Feld LLP recently interviewed with Bloomberg to comment on how prepacked bankruptcies pay off because working with management helps shape better solutions for creditor committees.
According to Moody’s Investor Services, the out of court restructuring recovery rate in bankruptcy for senior lenders may be as little as 35 cents on the dollar. Corporate defaults have climbed to 239 this year, and the number is estimated to increase well into 2010. The 12-month forecast for High Yield defaults is about 6.9%. Usually, as default rates increase, recovery rates fall. Prepacked bankruptcy negotiations with company management teams have been saving investors about 5% of their capital versus standard filings. These cooperative negotiations are up more than 26x over the past two years, according to Moody’s. A study by ratings agencies of prepacked bankruptcies from 1989 to 2009 shows a 54.6% recovery rate, versus a 49.6% recovery rate for standard bankruptcy procedures.
In prepacked bankruptcies, management teams work with lenders to set up plans before a company has the chance to file for Chapter 11. The first prepackaged bankruptcy was probably that of Dallas based Republic Health Corp. This form of negotiation became more popular in the 90s as a way to quickly recover on failed leveraged buyouts.
The major advantage of “prepacks” is that they save substantial time and disruption, versus a regular Ch. 11 bankruptcy filing. In a prepacked bankruptcy, votes for a reorganization plan have already been solicited and agreed upon before Ch. 11, speeding up the process. The average Ch. 11 case is rarely completed within a year and it can take up for three for a company to emerge from it. The longer a case usually takes, the more the intrinsic value of a company deteriorates.
More updates on the prepacked bankruptcy process will follow…