A CEO Copes With Chapter 11
What strikes fear into even the flintiest chief executive? Two possibilities: Having the board of directors withdraw its support and filing for Chapter 11. But horrors aside, running the bankruptcy gauntlet can actually be instructive.
June 1 1992 by Wayne E. Waldera
Much has been written about the alarming uptrend in corporate bankruptcies. But what statistics don’t show is the change in the content and process of Chapter 11 proceedings as companies seek court protection and time to reorganize.
Bankruptcy proceedings in the 1990s are a far cry from those in the 1980s. In 1982, when Wickes gained entry to the history books as the largest corporation to file for Chapter 11, I was president of Gambles, a major hardware franchiser and a Wickes subsidiary. At that time, the revised bankruptcy code was only four years old, and few companies knew or utilized the Chapter 11 mechanism as a means to restructure debt. For most creditors, lenders and managers, the process was a maiden voyage. It was difficult, but manageable.
A mere decade later, the expertise of Chapter 11 parties has increased commensurate with the number of filings. From the opening gavel, both secured and unsecured creditors are working to consolidate as much courtroom muscle as possible. Legal and financial professionals now view bankruptcies as their primary business, second only to M&A litigation.
Illustrative of the changes in Chapter 11 litigation is the recent experience of Amdura Corp. The company’s Coast
A BRAVE NEW WORLD
Amdura had been an old-line machinery and specialty manufacturing organization that decided to focus on one area. In the late 1980s, the company elected to expand its distribution business and made several large acquisitions, including the Denver-based Coast to Coast Stores business and Globe Distribution, an automotive after-market distribution business in the Northeast.
Acquisitions required substantial financing. But that was readily available in the leveraged buyout approach made popular in the fast-and-loose 1980s. In Amdura’s case, while the existing bank group displayed confidence in management, a major investor group was not convinced. A proxy fight was waged, and a new board of directors was brought in. It was late 1989, and the $800 million company now had no chief executive officer, no plans and massive loans falling due. The board asked me to take the reins of the company, and I became Amdura’s CEO in November 1989.
The company was deteriorating fast. Cash flows were tight, and banks had demanded-and achieved-a more secured position. Vendors had tightened credit lines or refused to ship goods, and store owners and managers fought to make sales under adverse conditions. The obstacles were not insurmountable, but any comeback effort would require sacrifices by employees and a cooperative effort by store owners, bankers and vendors. We came close, hut ran out of time. The only solution was Chapter 11, so we filed for protection in April 1990.
Amdura’s was one of the first Chapter 11 filings of the new decade, but other companies also have tested the choppy waters of the rapidly changing bankruptcy arena.
Some of the problems Amdura confronted may be pertinent to others who face a similar ordeal.
In any bankruptcy, it is a CEO’s responsibility to anticipate conflicting demands and interests, thereby providing creditors with the highest possible return. A chief executive must also manage the company’s resources and maintain corporate organization by providing services to the customer base. In the process, a business continues to function and return value to equity holders.
Once the frustrations of employees and store owners were addressed, many of the internal, organizational problems proved surmountable. Keeping the organization together required regular dialogue with division managers and store owner/ dealers. Active communication was a vital element in managing expectations to keep awareness up and fears down. By building on previously strong allegiances and addressing problems head-on, we were able to maintain dealer volume while selling our businesses.
Exceptionally tasking, however, was the process of meeting the demands of external parties-the court, the 14-member bank group, three creditors committees, retiree committees, and their financial advisers and legal representatives. The level of objections raised by the parties was staggering.
Attorneys representing major creditors were well-armed. First-day or emergency orders, which judges once approved without question, required lengthy testimony and resubmission. Each party took a stand and entrenched itself firmly. The level of hostility was high and unyielding. Meanwhile, of course, compromise is essential in any reorganization process. As chief executive, I discovered quickly that a vast part of every day would be spent trying to forge many different agreements between committees, banks and their professional representatives, while our attorneys fought for time from the court. Such struggles marked the 18-month Chapter 11 period, and they continued through the confirmation hearings and up to the effective date.
To reconcile conflicting demands, we needed a complex reorganization strategy. Assisted by our financial and legal advisers, we determined that our best shot to achieve negotiated settlements among the litigious parties would be to file a joint plan of reorganization-while simultaneously segregating the estates. This would be tough, but we were determined to try. At the time of the filing, Amdura was a 100-year-old company with $800 million in revenues. Moreover, it had engaged in complicated transactions that prompted all sides to seek to grab a legal or financial edge.
Eventually, we created three separate plans within a single, joint plan. There would be one plan for Amdura, one for Coast to Coast, and one for ANDCO. Had we attempted to keep the debtors unified and not forced compromise, the cost, delay and risk of lengthy, drawn-out litigation would have been disastrous. There would have been a delayed and reduced payout to all creditors, Amdura would not be reorganized today, and there would have been nothing for shareholders.
One of the reasons companies filed for Chapter 11 protection in the 1980s was the ready availability of new debtor-inpossession (DIP) financing. These days, the situation is somewhat different. With the merger trend in major banks, there are fewer wells to tap, and many of those still operating have been tapped out by high levels of problem debt.
Because of its heavily secured debt, Amdura was unable to attract a DIP lender. After discussion with the bank group and weekly trips to the court, the company was able to arrange certain cash collateral orders to keep operations alive until further negotiations could free additional cash. However, it proved disruptive to vendor and store-owner relations, already strained by the circumstances.
BITING THE BULLET
Ever-improving telecommunications speed transactions in all types of business. Information is more accessible, it travels faster, and decision making must keep pace.
That is especially true in the new bankruptcy environment. Analyses must be thorough yet immediate, and reality must be faced without flinching. For example, we found that there was little promise of keeping our national accounts business alive and retaining our independent store-owner base, while we were fighting weekly cash collateral battles in court. Thus, proceeding as quickly as possible, we focused resources on selling the distribution businesses before their value could further erode.
In fact, the decision to divest Coast to Coast and ANDCO was made within days after filing the Chapter 11 petition. Recognizing that time was of the essence, we sold these operations less than 12 weeks after we filed-faster than most people sell their homes. That delivered to estates and their creditors more than $100 million-versus an estimated liquidation value of between $48 million and $68 million.
Increasingly, companies that file for bankruptcy must answer not only to the bankruptcy court, but to government agencies. Two agencies active in the Amdura bankruptcy were the Pension Benefit Guaranty Corporation (PBGC) and the Environmental Protection Agency (EPA).
The squeeze in pension funding has put enormous pressure on the PBGC. The agency, in turn, often claims impairment that the debtor may well dispute. In Amdura’s case, the PBGC’s demand required attention on a par with that given to the unsecured creditors committee. After months of negotiation, we resolved the PBGC claim at some 25 percent of the original sum requested of each estate. We also allowed for funding of the pension plan over time.
Another active participant in the Amdura process was the Environmental Protection Agency. Given growing concerns about potential environmental infractions, this agency is likely to become even more visible in corporate reorganizations.
Politically, employee and retiree healthcare issues also are hot potatoes and will continue to remain so during the 1990s.
Once a plan of reorganization is prepared, filed, and amended, it is subject to approval by impaired classes of creditors. Consensus plans, once considered easily achieved, are becoming the exception rather than the rule. For a plan to be approved, the solicitation process must be strategically managed.
We approached solicitation differently for the three estates. We let the process run its course with the Amdura estate, a situation in which we had creditor committee and bank group support. For Coast and ANDCO, however, we accelerated communications far beyond the initial ballot distribution. Our goal was not plan approval-which we believed unattainable-but to encourage CEOs and credit managers of major unsecured creditors to become directly involved. In turn, we hoped they would exert pressure on both the bank group and the creditors committee to reach agreement.
The flurry of letters and phone calls that followed resembled a political campaign, but the strategy worked. Management became the mediator, and agreement was reached with the Coast committee in time for the confirmation hearings in early September 1991. ANDCO held out three months longer, but ultimately a settlement was reached between the committee and the bank group. This was no small feat: Both groups had been gearing up for a lengthy legal battle.
At risk of stating the obvious: The mediating role played by the chief executive during this process is crucial.
THE HUMAN FACTOR
A successful corporate reorganization depends as much on human interaction as it does on well-honed financial models or crisp legal arguments. Personalities-professional and otherwise-and hidden agendas play an increasingly important role in negotiations, especially as the bankruptcy case load rises and the cash vise tightens. Failure to allow for such intangibles can negatively affect the outcome of a Chapter 11 case.
To be sure, this was the case with the Amdura proceeding. The personalities of committee members, bankers, financial advisers, and lawyers affected the type and length of negotiations. Too, the demands of the bankruptcy judge-his requirements, availability and health-affected the case. To the hard-fighting executive, the often-irrational behavior and delay tactics of participants can, at best, prove frustrating. But they cannot be ignored.
WANTED: BANKRUPTCY SVENGALIS
The new bankruptcy environment requires executives of debtor companies to become instant Svengalis. Indeed, a CEO is called on to work magic, but in the process he must also become part operations manager, part politician, part psychologist and part diplomat. It also helps to have marathon-caliber endurance, because the pressure is growing for companies to complete the reorganization process as quickly as possible. There is neither the financing nor the patience to keep many companies operating under Chapter 11 protection for long.
Amdura’s Chapter 11 could easily have become a Chapter 7. And yet, through employee perseverance and skilled professional staffs, we were able to confirm the plan for all three estates. More than $140 million was brought into the estates for distribution to creditors, and Amdura emerged a pure manufacturing organization with reduced debt, restructured and streamlined operations, and a focus on businesses that are recognized as leaders in their industries.
The fight today is considerably tougher than it was a decade ago. The arena is larger, and there are more contestants in the ring. Staying off the ropes is a matter of relentless attention, a little fancy footwork, a great deal of sweat and the ability to withstand pain. Maintaining perspective-while everyone else is losing theirs-will separate the victors from the also-rans.
Wayne E. Waldera is a former president, chief executive officer and member of the board of directors of Amdura, which emerged from Chapter 11 last October. The company reorganized under subsidiaries The Crosby Group and The Harris Waste Management Group.