Keeping a clear view

Julie Hertzberg, of Alvarez & Marsal and Insol International, examines the balancing act distressed companies are playing in a modern restructuring

From her seat at Alvarez & Marsal in the US and as vice president of Insol, Julie Hertzberg has an inside view on the key drivers behind the biggest Chapter 11 bankruptcy cases in the US and a finger on the pulse of turnaround and insolvency issues worldwide. In a year that has continued to host large oil and gas sector restructurings, Hertzberg examines what path these have taken and what priorities they have had to weigh up. She also examines areas often neglected by companies and their advisors and the impact that claims traders can have on cases.

Oftentimes, trends and developments are driven by the industry cycles of bankruptcies. For the last 18 months, oil and gas restructurings have dominated the marketplace. Many companies acquired additional cash in early 2015 in anticipation of the reduction in oil and gas prices. When prices remained depressed, and companies realised they could not maintain their current leverage, they had to look at alternatives to de-lever their balance sheets. For companies with a US nexus, it was natural to contemplate strategies under a US Chapter 11 proceeding. By definition, assets of oil and gas companies are diminishing. Therefore, any Chapter 11 must prioritise speed as delay could result in a reassessment of the company's borrowing base and further reduce liquidity. Considering these facts, most oil and gas companies have evaluated the use of Chapter 11 for the sole purpose of a balance sheet clean-up or debt-for-equity conversion.

I would say the recent expansion of the use of pre-packaged or prearranged bankruptcies is driven by the facts particular to this industry: sufficient liquidity to obviate the need for debtor-in-possession financing; the requirement for a quick in-court solution; and the acknowledgement that most vendors are critical to running the business, which means most are paid pursuant to a first day motion. In these cases, the limited parties which are impaired are solicited prior to or immediately after a filing. This strategy limits the operational utility of a Chapter 11 proceeding, for example in renegotiating contracts, as that process may not be possible in the context of a pre-packaged or pre-negotiated case.

I also think companies' tolerance for fees in long-term cases has waned, and advisors evaluate the options they can exercise outside of a formal proceeding and work to limit the time in Chapter 11, which can potentially significantly reduce costs. Obviously, this is dependent upon the reasons for the need for a Chapter 11 filing.

In addition, the increase of claims traders playing an active role in buying up debts has altered the landscape. Depending on the percentage of debt for a particular class of claimants, the claims trader can impact negotiations to reach a consensual deal.

The question really must be answered on an individual company basis and is driven by the circumstances specific to the company. All three types of restructurings: traditional filings, pre-packaged and prearranged transactions are routinely used. The more important question is whether companies understand the benefits of each scenario, and what they give up.

Pre-packaged or pre-negotiated cases can be an effective way to quickly memorialise a fully or partially consensual deal but it limits the ability of a company to utilise the other benefits of the Chapter 11 process, such as the unilateral right to assume or reject contracts or bind parties, for example litigation claimants, to the in-court claims recovery process. Therefore, during the evaluation process companies should be certain that the cost benefit of a speedy and largely certain process outweighs the benefits of being able to renegotiate with certain parties or carve off liabilities to remain part of the estate and not pass to the reorganised debtor. I have seen companies file a pre-packaged Chapter 11 to effect a debt-for-equity exchange and ultimately end up back in a second proceeding because there were operational issues that weren't addressed in the first proceeding.

I would say there are two primary administrative processes which are often overlooked. First, internal and external communications associated with the restructuring process and second, the post-effective date clean-up of the old bankruptcy estate. It makes sense why both of these work streams may be overlooked by a company in the first instance.

Companies’ tolerance for fees in long-term cases has waned

Often, management is so involved in the transaction that when the time comes to finalise the deal they have been familiar with it for so long and forget that employees, vendors, suppliers and other interested parties do not have the specific details to give them confidence of the sustainability of the company. This can create an exodus of employees, discontent vendors who request to do business under modified terms (such as cash in advance or potentially not at all), or customers who search for alternative relationships. Early and carefully constructed messages for employees, media, customers, vendors and suppliers, governmental officials and other key constituents will substantially mitigate adverse reactions to the unknown of the situation. Ensuring consistent communications and proactive messaging will allow the company to remain in charge of the tone of the process and send a message of stability even during this time of financial crisis. Importantly, the company should not over-promise or guarantee any outcome; but getting ahead of any potential negative publicity of the situation will go a long way to reassure interested parties with appropriate and accurate messaging.

The second area that people do not fully consider is the post-effective date clean-up of the old bankruptcy estate. After a company successfully presents its plan of reorganisation to the court and the court confirms the plan, the newly reorganised company emerges but the bankruptcy case cannot close until all the obligations outlined in the plan have been fulfilled. This may be frustrating to companies which do not have a full perspective on the workload required to complete these tasks. Company employees with historical knowledge are often required to assist with the claims valuation process. At a minimum, quarterly fees for each legal entity are due to the Office of the United States Trustee. Unfortunately, due to the nature of certain claims, such as potential litigation or tax obligations, this process may take years to resolve. Few companies fully understand this additional phase of the process in the early planning stages.

Advisors can reduce this burden by drafting language within the plan of reorganisation to more effectively resolve claims disputes and eliminate some of the non-controversial administrative hurdles which would ordinarily require further court intervention.

The most recent development in the claims area relates to the US Supreme Court ruling in Czyzewski v. Jevic Holding Corp of March 2017. The Supreme Court ruled (six to two) in an opinion by Justice Stephen Breyer that the bankruptcy court, without consent from affected parties, cannot approve structured dismissals that "deviate from the basic priority rules" in paying creditors governed by statutory requirements, not even in rare cases.

The more important question is whether companies understand the benefits under each scenario and what they give up

Separately, a recurrent issue which surfaces in many large cases relates to claims which are purchased by claims traders. Claims traders routinely purchase claims through the Chapter 11 process and are required to file a notice of claim transfer. In certain instances, it is difficult to interpret the exact rights purchased by claims traders. There are instances where a claims trader will file a notice of claim transfer without fully identifying all the details of the claim which was ostensibly transferred. This makes it difficult, if not impossible, for the company and its advisors to show the rightful owner or to apportion the claim, where applicable.

Further, there is the debate over what constitutes a claim which can be purchased. For example, can a claims trader purchase a right to payment under a first day motion? What if the purpose of the motion is to induce the creditor who is a supplier or vendor to honour existing relationships and extend terms going forward (for example payments made pursuant to a critical trade motion)? Since the claims trader is not the underlying supplier doing business with the company, why would the company allocate its funds to pay this party? These and many additional ambiguous questions currently require substantial time to analyse each claim purchased by a claims trader.

Importantly, there has been a push by many professionals to draft language in a plan of reorganisation to reduce administrative steps in managing claims reconciliation processes which ultimately reduces the cost and time spent in a formal restructuring.

Within my practice at Alvarez & Marsal our team is dedicated to reducing the time and cost to administer bankruptcy cases. We are constantly improving the technology we use to administer cases to limit the professional hours required to wind down bankruptcy estates once a newly reorganised company has emerged from bankruptcy. In addition, as we look at the reporting requirements for a company going through Chapter 11, we are creating work product for clients which can be used to help manage their day-to-day back office operations. If companies are required to compile and report certain information, they may as well ensure it is prepared in a way which is beneficial to the company on a go-forward basis.

In my responsibilities as Insol vice president, I will continue to fulfil our mandate as a member-driven network maximising global economic value by improving solutions to cross-border issues, and advancing restructuring and insolvency systems through the deep expertise of our members.

About the author
		Julie Hertzberg Managing director, Alvarez & Marsal Vice president, Insol Michigan, US T: + 1 312 601 4220 E: jhertzberg@alvarezandmarsal.com Julie Hertzberg is a managing director with Alvarez & Marsal (A&M) and the head of A&M's claims management services group, where she specialises in Chapter 11 case preparation. She also sits on the executive committee for A&M's North American restructuring practice and is the vice president of Insol International, a 10,000 person insolvency and restructuring member organisation in over 80 countries. Hertzberg specifically oversees the Chapter 11 preparation and reporting requirements from pre-filing through distribution, including preparation of the creditor matrix, drafting of the schedules and statements of financial affairs, claims reconciliation, preference analyses, lease assumption/rejection analyses, distribution processes and all facets of post-confirmation wind down. She deals with the complexities of working with the various professionals and clients integrating the financial and legal reporting requirements necessary to file a Chapter 11 case. She has over seventeen years of restructuring experience and has advised on hundreds of Chapter 11 bankruptcy proceedings. Notable consulting assignments include: Lehman Brothers, Sandridge, Bonanza Creek, Vantage Drilling, Exide, Arcapita, Blockbuster, Patriot Coal, Visteon Corporation and The Chicago Tribune.