Credit Crisis' Next Victim: Bankruptcies

By Eric Torbenson and Maria Halkias

(MCT)-Companies seeking bankruptcy protection have a new hurdle, thanks to the credit crunch: finding money to survive the process.

The frozen credit markets have choked lending to struggling companies that need loans just to make it through Chapter 11 restructuring.

Business insolvencies are on the rise as credit markets grind gears and consumers spend less because of the chaos.

The needed loans aren’t impossible to get if a company has hard assets to offer as collateral. But leveraged companies that live hand-to-mouth-like many retailers-may be able to get loans only at very high cost or perhaps not at all.

Without the so-called debtor-in-possession financing, companies are left to muddle through the recession, restructure out of court or possibly liquidate-a step Linens ‘n Things just took.

“There are fewer companies offering the financing, and we’ve seen interest rates really go up,” said Ted Vaughan, partner at accounting firm BDO Seidman LLP in Dallas.

Companies looking for lifeline cash can expect to pay 5 percent to 7 percent-double what they usually pay. And instead of getting the money for two years, the terms will be for as little as six months.

“It’s a question of price,” said Bob Albergotti of Haynes and Boone in Dallas, which has 34 attorneys in its restructuring group, among the nation’s largest. “There’s money out there-but folks aren’t going to take fliers on companies.”

With players such as Bear Stearns and Merrill Lynch purchased and with private equity firms running short of cash, the lack of competition makes it that much harder on companies that need the money now. And there’s possibly even less money for companies already in bankruptcy and looking for money to get out.

Retailer Linens ‘n Things said in mid-October that it couldn’t find a buyer and planned to start liquidating its 371 stores two days later. Home Interiors and Gifts Inc. set a bankruptcy hearing date to auction itself off because it couldn’t find backers to take another crack at running the Carrollton, Texas-based direct marketing business.

The credit crisis, coupled with the gloomiest holiday shopping season outlook since 9/11, means bankruptcies-especially for retailers-will spread, bankruptcy lawyers said. The difference this time is that in many cases, it will be the end of the line.

“We’re going to see more companies do what Bennigan’s did-just go straight to Chapter 7,” said Laura Davis Jones, managing partner of the Delaware office of law firm Pachulski Stang Ziehl & Jones.

In July, Plano, Texas-based S&A Restaurant Corp., parent of Bennigan’s Grill & Tavern and Steak & Ale, became the second-largest U.S. restaurant bankruptcy when it abruptly closed 130 locations instead of trying to find new money.

Also recently, CompUSA and Bombay Co. both liquidated. The American Bankruptcy Institute predicts the most retail bankruptcies this year since 32 retailers filed for protection in 2001.

Retailers usually file for bankruptcy in January and February, after one more try to lift their prospects during the all-important holiday shopping season. Holiday sales also build up their cash reserves to take into bankruptcy, said Howard Brod Brownstein, a turnaround specialist and principal of Nachman Hays Brownstein Inc. in Philadelphia.

Analysts have speculated that this may be the final holiday season for Circuit City Stores Inc. The No. 2 consumer electronics chain has been for sale for some time, and for two weeks its stock has closed below the $1 threshold to remain listed on the New York Stock Exchange. It closed at 40 cents a share Tuesday.

Lenders are saying a store’s brand name, its inventory and real estate aren’t worth nearly as much for collateral as they were a year ago, making loans harder to get.

“The onset of the subprime mortgage debacle moved the goal post on the collateral issue,” said Brownstein. “Banks have much less patience for a turnaround. They don’t want to wait around to see if a reorganization is possible. Now they say, ‘Let’s just get this over with.'”

Bankruptcies may slow until credit markets flow again, and some companies may try harder to restructure their debts outside of court.

The credit markets “are hindering restructurings everywhere,” said Adam Dunayer, managing director at the Dallas office of restructuring firm Houlihan Lokey. It might reward some companies to hold off, but “my clients can’t afford to wait.”

Money will remain tight, Dunayer said, because there’s uncertainty every day with markets.

“Every loan in these cases is, in a sense, a bet,” said Toby Gerber, a bankruptcy attorney for Fulbright & Jaworski LLP in Dallas, where restructuring attorneys have had all the work they can take for some time.
“There’s lots of other bets to be made with money out there,” he said. “The economy is really in uncharted waters, and no one knows precisely where the risk for insolvency might be.”