Survey Finds Free-Fall Bankruptcies Becoming More Rare

The days of crash-and-burn bankruptcies may be flaming out.

An AlixPartners LLP survey released Wednesday found that most restructuring professionals expect that more than 50% of the large companies filing for Chapter 11 in the next 12 months will have at least a semblance of a turnaround plan in place when they enter bankruptcy.

And nearly all those surveyed, 97%, said those so-called prearranged and prepackaged filings have become a permanent part of the bankruptcy landscape.

In such bankruptcies, companies have started to negotiate with creditors, line up financing and prepare an exit plan before they file. That’s a departure from even a few years ago, when most companies didn’t start such talks until after filing for Chapter 11.

“Prearranged and prepackaged is the preferred way,” said Peter Fitzsimmons, co-head of AlixPartners’ turnaround and restructuring services practice. “Stakeholders want to know what the solution is when a company files.”

In the survey of 80 bankruptcy lawyers, investment bankers and fund managers, 49% of respondents said they expect prearranged and prepackaged filings to account for between half and three-quarters of all bankruptcies in the coming year, and 18% of respondents said such filings would account for an even larger proportion.

The more orchestrated filings were the favored choice among companies with more than $100 million in assets that filed in 2010, according to an AlixPartners analysis.

Last year, 52% of those companies sought a prearranged or prepackaged bankruptcy, up significantly from the 21% that choose the route in 2009.

Brian J. Fox, the AlixPartners managing director who conducted the analysis, expects that trend to continue.

“Being in bankruptcy is not good for business,” he said. Negotiating ahead of time cuts short a company’s stay in Chapter 11 and thus reduces the impact of the filing on customers, vendors and creditors.

That’s not to say the restructuring itself take less time, Fox said; it’s just that more of the process is complete by the time a company files.

But not all bankruptcies negotiated ahead of a filing are the same. With a prepackaged filing, a company on the first day of the case presents the court with a complete plan that a majority of creditors already voted to approve. Essentially, a judge needs only to sign off on the strategy and the company is cleared to exit bankruptcy.

With a prearranged plan, a company typically has an outline of what it wants to accomplish, such as a sale to a third party, but may not have support from all necessary creditor groups.

Fox said companies that file for prearranged bankruptcies often have run “out of cash and out of clock” to get all the way to a prepackaged deal, and those firms that “free fall” into bankruptcy typically didn’t have the liquidity to survive out of court long enough to complete talks with creditors.