The Deal on Chapter 11 Prepacks

Prepackaged bankruptcy filings seem to be more common. For example, multititle mailer Orchard Brands last month filed for a prepackaged Chapter 11 to reorganize debts and expects to get out of bankruptcy in a few months.

Gifts and novelties cataloger Oriental Trading Co. earlier this week emerged from a prepackaged Chapter 11 it had filed in August. Multichannel Merchant parent company Penton Media last year filed a prepackaged bankruptcy plan and emerged from Chapter 11 in a month.

While prepackaged bankruptcies are not a new trend, says Craig Battle, managing director at investment bank Tucker Alexander, “you see more of them in recessions and challenging economic climates.”

Companies with critical mass, operating cash flow and assets of value often choose “prepacks,” Battle notes. “This approach is attractive, because it recapitalizes the company at proper levels, with new debt and equity, and by having it lined up in advance they are in and out of bankruptcy quicker.”

When the lenders are owed large sums of money, and a sale of assets would not generate nearly what they are owed, they might opt for a prepackaged bankruptcy, says Lee Helman, managing director with investment firm Financo. “The lenders often times will attempt to negotiate with all constituencies a deal in which they agree to wipe out a lot of debt in exchange for the lenders becoming substantial/significant or even complete owners of the business.”

Bankruptcy prepacks are popular now for several reasons, says David Solomon, co-CEO of investment firm Lazard Middle Market. For one, changes to the bankruptcy law in 2008 shortened the available time for a company in bankruptcy, which has led debtors “to try to get their ducks in a row before entering bankruptcy,” he says.

“For companies with solid underlying businesses but too much debt, a prepack can result in less business disruption, which preserves more business value through the bankruptcy process,” Solomon explains. “That’s because a prepack is not only faster, but has much more certainty.”

Solomon adds that prepacks are typically more common when the capital structure is less complex “and there is less to argue about.”

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