The Examiners: Chapter 11s Can’t Ignore Operations

When a company files for Chapter 11 protection a second, third or even fourth time, who’s to blame?

If 15% of companies that emerge from Chapter 11 file again, that implies an 85% success rate—and, given the complex, highly contested environment of corporate restructurings today, not to mention the current lackluster macroeconomic conditions, I’d say that’s not a bad batting average.

Bankruptcy aims to be a court of equities. When a company emerges from Chapter 11, a plan is put forth by the sponsor(s) with the informed approval of a majority of creditors and the support of informed parties providing exit financing. The plan sponsors, professionals and parties of interest all share the common objective of an equitable and balanced plan for the debtor.

The reality is that a plan of reorganization does not ensure success any more than a heart bypass operation ensures continued good health and a healthy lifestyle. If a patient who led an unhealthy lifestyle is told that bypass surgery is the only way for him to survive, he would likely elect to have the surgery. But that surgery does not change the unhealthy lifestyle that led to the problem. The same is true of companies; unless they go through an operational fix as well as a financial fix, the company may very well find itself facing the same challenges that got it into the bankruptcy process to begin with.

I suggest that one of the reasons we are seeing more repeat bankruptcies is that companies’ operations often aren’t being addressed in the original bankruptcies (either during the Chapter 11 or shortly thereafter), setting up those companies (and their sponsors) for repeat trouble down the road. Holistic turnarounds—those that address underlying operations along with the capital structure—are the way to maximize the Chapter 11 process and minimize Chapter 22s and 33s. But until all parties involved in a restructuring become as committed to the operational restructuring as they are to the financial restructuring, companies may continue to be at risk of repeat bankruptcies. A lack of attention to the underlying, operational problems is shortsighted and is a disservice to the company, its employees and all stakeholders, as well as to the overall process.

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP and is based in New York. Follow her on Twitter at @LisaJDonahue.