High and tight

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High and tight

17 the daily deal T hu r sday Decembe r 17 2009
BANKRUPTCY
INSIDER
a n a b s o l u t e p r i o r i t y f o r b a n k r u p t c y p r o f e s s i o na l s
Week of Thursday, December 17, 2009
High and tight
Bankruptcy Database
The Deal’s online resource for
information on filings, advisers,
bankruptcy M&A, DIP fundings, exit loans and more. It’s
part of your subscription to
The Deal Pipeline and
pipeline.thedeal.com.
As lawyer pay rises, the gap between New York and Delaware shrinks
W
hile the five largest bankruptcies of 2009 were filed in
Manhattan, the difference in
pay scale between what debtor counsel
there and in Delaware earn is a mere $8
per hour in the New York court’s favor.
At least that’s according to a pipeline.
thedeal.com study of the five largest
cases in terms of assets filed this year in
each of those popular bankruptcy venues. The average hourly rate for debtor
Volume 6, Issue 24
21 Deal doctors
Greenberg Traurig Maher adds Norley,
Alberts moves to Dickstein Shapiro,
MidOcean Partners appoints Miller chairman
Special section:
Year in review
23 Debtor-in-possession loans
Bankrupt companies secured 356
postpetition loans through Nov. 15, with
existing lenders dominating the landscape
30 Exit financings
New money remains in short supply, but
lending options for debtors are increasing
and prices are dropping
33 Private equity filings
Easy and cheap debt at the tail end of the
buyout boom left many bankruptcies in its
wake this year
38 Venture capital filings
With capital markets constricted, some 40
VC companies fell into bankruptcy, with a
majority heading to liquidation
Bankruptcy Insider is published every
other Thursday as a feature in The Daily
Deal, a service of The Deal Pipeline.
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information, please call 888-257-6082.
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counsel in the cases filed in Manhattan—
Chrysler LLC, Lyondell Chemical Co.,
General Growth Properties Inc., CIT
Group Inc. and General Motors Corp.—
is $913, versus $905 for the largest cases
filed in Wilmington—Capmark Financial Group Inc., Nortel Networks Inc.,
R.H. Donnelley Corp., Smurfit-Stone
Container Corp. and AbitibiBowater
Inc.
In reprising the study—we first did it
in 2001, looking at large cases and hourly
rates for 1990, 1995 and 2000—the $8 gap
is the narrowest when comparing those
years and cases in 2005 and 2009 in both
venues for debtor counsel. Just as interesting, perhaps, is that the $68 schism
among associates in the 2009 cases
($604 per hour in Delaware versus $672
in New York) and the $46 gap among
paralegals ($227 per hour in Delaware
versus $273 in New York) represent the
widest in the five years studied.
Nowadays, debtor counsel such as
Deryck Palmer of Cadwalader, Wickersham & Taft LLP in the Lyondell case
make $1,050 per hour. But in the cases
pipeline.thedeal.com looked at in 2001,
the hourly rates understandably were
much lower. For example, the top earner, Harold Novikoff at Wachtell, Lipton,
Rosen & Katz, was billing $675 per hour
in W.R. Grace & Co.’s Delaware case.
One bankruptcy academic, Lynn LoPucki, Security Pacific Bank professor of
law at the UCLA School of Law, calculates that bankruptcy fees have risen at
a rate of about 8% to 10% yearly for each
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18 the daily deal Th urs day December 17 2009
NEXT CHAPTER YEAR IN REVIEW
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the past five years nationwide, regardless
of court. That rise is about double the rate
of inflation and is about on par with the rising costs of healthcare, he says.
But bankruptcy lawyers disagree. They
claim the work is getting harder and requires longer hours.
“The biggest differences between 2005
and 2009 are the size of the matters, the
complexity and the number of large cases
that have been filed,” says Richard Cieri of
Kirkland & Ellis LLP, who charged $795
per hour to work on Calpine Corp., one of
the biggest New York cases in 2005. “Cases
now are much larger.”
Another New York bankruptcy attorney,
who asked not to be named, agrees. “Bankruptcy cases these days have become more
and more complicated,” he notes. “Cases
these days are also shorter, with several
large companies emerging in months instead of years. Our partners and associates
are doing more and more work per hour.”
Palmer, for example, has logged 1,428
hours of work for the first eight months
of Lyondell’s bankruptcy case. And there
are attorneys that are charging even more.
Witness Adam Plainer of Jones Day, a
debtor counsel for Chrysler. Plainer is in
Jones Day’s London office and is billing
$1,175 an hour (the weak U.S. dollar is likely a factor in that, too), but his part of the
case has only consumed about 15.9 hours
of work, and so we’re not including him in
our analysis.
Still, bankruptcy attorneys can’t dispute that they’ve seen a healthy bump in
their hourly rate. The highest earners for
the largest 2005 cases we looked at in New
York and Delaware—N. Lynn Hiestand
and J. Gregory Milmoe of Skadden, Arps,
Slate, Meagher & Flom LLP—each billed
$835 per hour for their work in Refco Inc.’s
New York bankruptcy. Palmer’s rate is 26%
higher, far beyond the rate of inflation.
“The rates reflect the tremendous increase in demand,” Cieri says.
And Milmoe himself believes bankruptcy attorneys still may not be getting
their due. “I do not think that bankruptcy
fees have gone up compared to other legal
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fees,” Milmoe says, pointing to a study he’s
seen in which several M&A lawyers are
charging in excess of $1,100 per hour. “To
the contrary, I think bankruptcy fees are
lagging behind increases in other fees, on
a per-hour basis.”
LoPucki isn’t sympathetic to that argument. “There’s no one controlling rates,”
he says. “The debtor doesn’t have much
incentive to control fees, since a lot of it is
essentially being paid by the creditors. The
court can’t control fees, because the cases
would simply go elsewhere. Put yourself in
the judges’ position. If all of the judges in
New York got together and said, ‘We’re going to draw a line on fees,’ lawyers will take
cases to Delaware.”
Partners are not the only ones reaping
the benefits of the higher billing rates. Associates who do a significant portion of
the work in modern-day bankruptcies as
a whole have also received a significant
boost in salaries.
Take Reuven Falik, an associate at Paul,
Weiss, Rifkind, Wharton & Garrison LLP
working on the 2009 Delaware bankruptcy
filing of AbitibiBowater. The $660 that he
is billing per hour is about 33% more than
the $495 that Marion Quirk of Skadden
charged for serving in a similar role in 2005
in another Delaware case, Birch Telecom
Inc. Falik did not return calls for comment.
(Besides Birch Telecom, the other 2005
Delaware cases we studied were Foamex
International Inc., Meridian Automotive Systems Inc., FLYi Inc. and American Business Financial Services Inc. In
New York, besides Calpine and Refco, we
looked at Delphi Corp., Northwest Airlines
Corp. and Delta Air Lines Inc.)
The same increases also apply to paralegals. Cadwalader is billing $385 for Wendy Kane in Lyondell, the most in the 2009
cases we looked at. That rate is 60% higher
than the top rate for 2005 cases—the $240
that Kirkland billed for Beth Friedman in
Calpine.
The pay scale in Delaware is growing
faster than the one in New York, too. The
highest-earning debtor counsel in the Delaware cases billed at an average of $905
per hour, a 21% higher clip in 2009 than
the $747 they did in 2005. In the New York
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cases, there was a 17% rise between 2009’s
$913 and 2005’s $779.
The top associates fared the best, however. Delaware associates are earning a
whopping 45% more today than they did
in 2005, with their average rate for five cases rising to $604 an hour from $417. Associates in New York are narrowly outpaced
but still enjoy a 44% increase in pay ($672
in 2009 versus $468 in 2005.)
The boost for paralegals mirrored those
of partners. In Delaware, the $227 per
hour average in 2009 was 27% loftier than
2005’s $179. In Manhattan, the $273 average rate in 2009 was an impressive 52%
higher than the $180 four years earlier.
What associates and paralegals are billing is noteworthy, since they are amassing more billable hours than partners. But
one reason for this, Milmoe says, is that
“partners delegate work down for cost efficiency.” After all, assigning mundane paperwork to a paralegal billing for $150 an
hour is more cost efficient than having a
$950 per hour partner deal with it.
In 2005, there was little difference between the pay scale of paralegals in New
York and Delaware. Manhattan had a $1
an hour edge. The mere fact that the gap
has widened by $45 since then speaks to
the fact that Manhattan is attracting many
more cases.
Alas, it’s something that Delaware,
which once before eclipsed Manhattan’s
dominance as a bankruptcy venue, is aware
of. “Of course,” LoPucki says. “They compete for the big cases. Big-case bankruptcy
is a business for Delaware. It’s an important industry for the state. In New York, it’s
an important industry for the bankruptcy
community. Neither jurisdiction wants to
lose big cases.”
And neither really has. In 2005, of the
10 largest Chapter 11 cases, six were filed in
New York and one was filed in Delaware.
Their dominance has grown in 2009; of
the 10 largest Chapter 11 cases, six were
filed in Manhattan and three were filed in
Delaware.
That means hourly pay for partners,
associates and paralegals is only likely to
keep growing in both jurisdictions. n
—Kevin Fung
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19 the daily deal Th ur s day De cember 17 2009
BANKRUPTCY FEES LARGEST CASES Jan. 1–Nov. 15, 2009
DELAWARE 2005
Debtor counsel / co-counsel
Hourly fee
Partner
Hourly fee
Associate
Paralegal
Hourly fee
Various paralegals
$125-$195
Various paralegals
$155
Debbie Laskin
$175
Lauren Hoeflich
$165
Debtor: Birch Telecom Inc.*
Skadden, Arps, Slate, Meagher & Flom LLP
$825
J. Gregory Milmoe
Mark S. Chehi
695
Alan Kornberg
$785
Brian Hermann
585
$495
Marion Quirk
Christopher Chow
430
Justin Brass, Ephraim Diamond
435
Pang Lee
310
Debtor: Foamex International Inc.*
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Young Conaway Stargatt & Taylor LLP
Pauline K. Morgan
M. Blake Cleary
Debtor: Meridian Automotive Systems Inc.*
Sidley Austin Brown & Wood LLP
James Conlan, Larry Nyhan
Janet Henderson
$460
Joseph Barry
$325
385
Kenneth Enos
225
$725
Paul Caruso
$450
650
Lori Kujawski
250
$475
Robert Brady
$345
Edward Kosmowski, Edmon Morton
95
Susan Summerfield
Thomas Hartzell
$170
D.M. Sciabarassi
$205
$325
Debbie Laskin
$175
225
Michelle Smith
110
220
Ian Fredericks
Debtor: FLYi Inc.*
Jones Day
Paul Leake
$725
Brad Erens
605
$460
Brendan Linehan Shannon
385
M. Blake Cleary
Debtor: American Business Financial Services Inc.*
Blank Rome LLP
Thomas Biron, Michael Brownstein
Hangley Aronchick Segal & Pudlin
$595
Raymond Patella
300
Joseph Dworetzky
$505
Alan Promer
$430
S. Friedman
260
K.M. Neff, R.S. Barr
Joseph Malfitano
Ian Fredericks
$275
J. Staib
195
L. McCloskey
$275
Matthew Hamermesh
$210
J. Recchiuti
190
M. Dero
$150
Jennifer Grieves, Christine Hewlett
300
DELAWARE 2009
Debtor: Capmark Financial Group Inc.†
Dewey & LeBoeuf LLP
$625-$995
Richards, Layton & Finger PA
Mark Collins
$675
$385-$625
Jason Madron
$345
Lee Kaufman
275
$155-$275
Aja McDowell
$195
Various paralegals
$275
Debtor: Nortel Networks Inc.*
Cleary Gottlieb Steen & Hamilton LLP
Morris, Nichols, Arsht & Tunnell LLP
James Bromley
$940
Lisa Schweitzer
870
Robert Dehney
$725
Derek Abbott, Eric Schwartz
550
Jesus Beltran,
Sandrine Cousquer, Sanjeet Malik
$605
Daniel Butz
$415
210
Various paralegals
265
Erin Fay
$205
Angela Conway, Renae Fusco
Emma Campbell, Jason Kittinger
190
Debtor: R.H. Donnelley Corp.*
Sidley Austin LLP
James Conlan
Jeffrey Bjork, Paul Caruso
$925
700
$625
Bojan Guzina
Nancy Lusk
$190
Melissa Bertsch, Casey Cathcart
$155
375
Various associates
Robert Brady
$610
Edmon Morton
480
$325
Kenneth Enos
310
$925
Bojan Guzina
$625
650
Peter Booth
Donald Bowman
145
Anastasia Joseck
Debtor: Smurfit Stone Container Corp.*
Sidley Austin LLP
James Conlan, Larry Nyhan
Dennis Twomey
315
Robert Brady
$610
Matthew Lunn
$375
Edmon Morton
480
Robert Poppiti
260
Kelley Cornish
$925
Reuven Falik
$660
$230
Nancy Lusk
150
Michelle Smith
Debtor: AbitibiBowater Inc.*
Paul, Weiss, Rifkind, Wharton & Garrison LLP
395
Various associates
Joel Waite
Pauline Morgan
$610
Sean Greecher
$330
600
Pilar Kraman
240
William Keller, Joseph Monzione
$225
165
Sharon-Cind Meister
$210
Debbie Laskin
145
Anastasia Joseck
Source: pipeline.thedeal.com
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BANKRUPTCY FEES LARGEST CASES Jan. 1–Nov. 15, 2009
NEW YORK 2005
Debtor counsel / co-counsel
Hourly fee
Partner
Hourly fee
Associate
Paralegal
Hourly fee
Various paralegals
$60- $230
Various paralegals
$75-$230
Debtor: Refco Inc.*
N. Lynn Hiestand, J. Gregory Milmoe
Eric Davis, Felicia Gerber Perlman
$835 Various associates
$540
695 Loren Friedman, Douglas Herrmann,
Karen Skomorucha
295
$826 Chris Dickerson, Christian Pilkington
$540
Debtor: Delphi Corp.*
N. Lynn Hiestand
John Lyons
645 Allison Verderber Herriott
354
Debtor: Northwest Airlines Corp.*
Cadwalader, Wickersham & Taft LLP
Bruce Zirinsky
Gregory Petrick
$800 Ingrid Bagby, Deborah Piazza
665 Alexander Strom
$470
Peter Vail
$215
230
Donna Kirk
100
Debtor: Calpine Corp.*
Kirkland & Ellis LLP
Richard Cieri
Edward Sassower
$795 Leonard Budyonny, Evan Gartenlaub,
Javier Schiffrin
520 Robert Urband
$455
Beth Friedman
$240
330
Michael Levin
105
Debtor: Delta Air Lines Inc.†
John Fouhey, Marshall Huebner,
Benjamin Kaminetzky
Davis Polk & Wardwell
$495-$785
$195-$475
$70-$220
NEW YORK 2009
Debtor: Lyondell Chemical Co.*
Cadwalader, Wickersham & Taft LLP
Deryck Palmer
Christopher Mirick
$1,050 Scott Griffin, Doug Mintz
700 Various associates
$615 Wendy Kane
$385
335 Victoria Taylor
135
Debtor: CIT Group Inc.†
$730-$995
$360-835
$175-$295
Debtor: GENERAL GROWTH PROPERTIES INC.*
Weil, Gotshal & Manges LLP
Marcia Goldstein
Kelly Dybala
Kirkland & Ellis LLP
James Sprayregen
$950 Elisa Lemmer
725 Gabriel Morgan
$965 Chad Husnick, Scott Kitei
$640 Kathleen Lee,
Christopher Stauble
$245
355 Ramesh Dhanaraj
95
$610 Beth Friedman
$275
Debtor: General Motors Corp.†
Weil, Gotshal & Manges LLP
$650-$950
$355-$640
$155-$290
Debtor: Chrysler LLC*
Jones Day
Corinne Ball, David Heiman
575
Carl Black
$600 E.L. Goodman,
D.M. Hirtzel, M.B. Stone
$900 V. Roovers
225 A.K. Sobczak
G.R. Howard
*Interim fee application
† Retention motion
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$275
250
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21 the daily deal Thursday Decem ber 17 2009
DEAL DOCTORS MOVERS & SHAKERS
L
yndon Norley has joined Greenberg Traurig Maher LLP to launch
its restructuring practice.
Before joining the U.K. branch of Greenberg Traurig LLP, the London shareholder led the European restructuring practice
of Kirkland & Ellis International LLP.
He was debtor counsel for Dura Automotive Systems Inc. and advised the administrators of Collins & Aikman Europe.
In addition, Norley has worked on the restructurings of Groupe Eurotunnel SA,
J.L. French Automotive Castings Inc.,
Nybron Flooring International, Sea
Containers Ltd. and UAL Corp.
Dickstein Shapiro LLP has added Sam
J. Alberts to its bankruptcy and creditors’
rights practice in Washington.
Alberts previously led the Washington
financial restructuring and insolvency
group of White & Case LLP. Before that,
he was a partner at Akin Gump Strauss
Hauer & Feld LLP.
He has served as debtor counsel for
Sunchase Capital Partners XI LLC and
Mirant Corp., represented creditors of
MCSi Inc., Hospital Partners of America Inc. and Lehman Brothers International
(Europe) Ltd. and was liquidating trustee
of Doctors Community Healthcare Corp.
Middle-market private equity firm MidOcean Partners LP has named restructuring veteran Robert S. Miller chairman.
Miller last served as executive chairman of Delphi Corp. (he earlier was chairman and CEO) and has also led the incourt restructurings of Bethlehem Steel
Corp. and Federal-Mogul Corp. He began
his career at Ford Motor Co. in 1968 and
subsequently worked at Chrysler Corp.
for 13 years, where he led the financial
negotiations with some 400 lenders and
the federal government that resulted in
the Chrysler Corp. Loan Guarantee Act of
1979. Miller was a senior partner at investment bank James D. Wolfensohn Inc. from
1992 to 1993.
He currently is a director of American
International Group Inc., Symantec
Corp. and UAL.
Former MidOcean chairman Mark An-
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gelson remains a board member. In September he became chairman and CEO of
World Color Press Inc., the post-Chapter
11 name of Quebecor World Inc. He previously was nonexecutive chairman.
MidOcean appointed Angelson chairman in December 2007 following his retirement as CEO of printing services company R.R. Donnelley & Sons Co.
Investment management firm Consilium
Investment Management has launched
a fund focused on debtor-in-possession
financing and superpriority loan opportunities.
In a statement, Consilium chief investment officer Jonathan Binder said “reduced competition and recent history of
increasing bankruptcies have created an
opportunity of unusual magnitude for
participating in DIP financing.” The firm
called attention to what it said was the current “highly constrained” role of banks in
postpetition funding.
Consilium joins the roster of firms
that recently launched funds that at least
in part will participate in DIP financing:
Tennenbaum Capital Partners LLC
(the $330 million Tennenbaum DIP Opportunity Fund LLC), Sankaty Advisors LLC (roughly $673 million raised
for Sankaty DIP Opportunities Fund),
Third Avenue Management Inc. (Third
Avenue Focused Credit Fund, a mutual
fund), Brookfield Asset Management
Inc. (a C$1 billion [$950 million] distressed-debt fund) and Marlin Equity
Partners LLC (the $650 million Marlin
Equity III LP). The vehicles are part of a
wave of new distressed debt and equity
funds.
Brad Hillier has shifted to the New York
office of AlixPartners LLC.
The director formerly was national
service line leader for KPMG LLP’s restructuring network and led its cash and
liquidity service. He earlier was a director
at PricewaterhouseCoopers LLP.
Investment bank Global Hunter Securities LLC has added Steve Sebastian as
co-head of financial advisory and restruc-
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turing services. The managing director
will work with counterpart Jeff Zolkin
from a new Los Angeles office.
Sebastian previously was a managing director at Chanin Capital Partners. Before
that, he provided financing to middle-market companies at Ravenscourt Capital and
worked at Bear, Stearns & Co. and Bankers
Trust Co. He has been financial adviser
to Crescent Jewelers Inc. and investment
banker for Legacy Estate Group LLC.
Sarah Smith has joined the London office
of Bingham McCutchen LLP.
The Bingham partner was co-head of
Sidley Austin LLP’s international finance
group in London and led the firm’s Singapore finance practice from 1996 to 1998.
She will initially focus on general restructuring and finance matters.
Fred Zeidman is the newest principal at
XRoads Solutions Group LLC. He joins
the firm’s global energy practice in Houston.
Zeidman most recently was chief restructuring officer of Transmeridian Exploration Inc. and interim president of
Nova Biosource Fuels Inc. He also served
as CEO, president and chairman of Seitel
Inc. during a turnaround of the company.
The International Women’s Insolvency &
Restructuring Confederation honored N.
Lynn Hiestand on Dec. 4 as 2009 Woman
of the Year in Restructuring.
The Skadden, Arps, Slate, Meagher &
Flom LLP partner, who serves as co-head
of the law firm’s European corporate restructuring practice, switched to restructuring in the early 1990s from mergers and
acquisitions work. She helped build Skadden’s London restructuring practice. The
group, founded in 2004, now has 11 fulltime members.
She recently has represented Nokia
Siemens Networks BV in its bid for the
wireless infrastructure business of Nortel
Networks Corp.; Koenigsegg Automotive AB and investors in their bid for
Saab Automobile AB; Nomura Holdings
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22 the daily deal Thursday Decem ber 17 2009
DEAL DOCTORS MOVERS & SHAKERS
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Inc. in its acquisition of certain Lehman
Brothers Holdings Inc. assets; Hayes
Lemmerz International Inc.; and the
joint liquidators of Flightlease Holdings
(Guernsey) Ltd. and other affiliates of
Swissair Group AG.
Hiestand previously was debtor counsel
for Comdisco Inc., Delphi, Kmart Corp.
and Refco Inc.; represented asset acquirer
UC Rusal in the Kaiser Aluminum Corp.
case; and advised lender Deutsche Bank
AG in the OAO NK Yukos case.
She began her career at Fried, Frank,
Harris, Shriver & Jacobson LLP after
clerking for Judge Pierce Lively of the U.S.
Court of Appeals for the Sixth Circuit.
Milbank, Tweed, Hadley & McCloy LLP
has elected five new partners, including
financial restructuring associates Evan
Fleck and Tyson M. Lomazow in New
York.
Fleck represents the official committee
of unsecured creditors of Lehman Brothers
and has served as debtor counsel to Northwest Airlines Corp. and Enron Corp. He
also has represented the creditors’ committee of Heartland Automotive Holdings Inc. and Calpine Corp. noteholders.
Lomazow has advised debtor Corn
Exchange LLC, the DIP agents for Hayes
Lemmerz and Cooper-Standard Automotive Inc., unsecured banks of Capmark
Financial Group Inc. and the creditors’
committee of VI Acquisition Corp.
Weil, Gotshal & Manges LLP has appointed three new partners and six new
counsel, effective Jan. 1, including business
finance and restructuring attorneys Ronit
Berkovich and Elisa Lemmer.
Berkovich, a New York senior associate, joins Weil’s partnership. She serves
as debtor counsel for BearingPoint Inc.,
Motors Liquidation Co., Lehman Brothers and Lenox Group Inc. and previously
represented WorldCom Inc., Parmalat Finanziaria SpA and Vertis Inc., as well as
the examiner of FiberMark Inc.
Lemmer, a Miami associate, will become counsel.
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turing; bidder Ice Edge Holdings LLC in
the Dewey Ranch Hockey LLC case; and
first-lien lenders of UTGR Inc.
Hottest debtor-inpossession lenders
Ranked by number of new loans and total loan
volume during the three months ended Dec. 10
Rank
1
2
Rank
Firm
No. of
new DIPs
General Electric Co.
5
Bank of America NA
3
Credit Suisse AG,
Cayman Islands Branch
3
Firm
Volume
($mill.)
1
Bank of America NA
$557.5
2
3239432 Nova Scotia Co.
219.0
3
Credit Suisse AG, Cayman
Islands Branch
175.0
4
Wilmington Trust FSB
150.0
Goldman Sachs Lending
Partners LLC
105.0
Jefferies Finance LLC
105.0
5
Latham & Watkins LLP has named 23
new partners and 13 new counsel, effective
Jan. 1.
New tax partner Julie Marion in Chicago and corporate partners Dirk Kocher
in Hamburg, Rory Negus in London, Kilian Helmreich in Munich and Hiroki
Kobayashi in Tokyo all have some experience with corporate restructuring or insolvency.
Similarly, finance counsel Olivier Vermeulen in Doha, Qatar, has debt restructuring experience, and employment law
counsel Lionel Vuidard in Paris has advised in restructurings.
Scott Greenberg will be the newest special counsel in the financial restructuring
department of Cadwalader, Wickersham
& Taft LLP next year.
The New York attorney has represented
Lyondell Chemical Co., Atkins Nutritionals Inc. and Saint Vincent Catholic Medical Centers of New York; the Portland
Trailblazers in an out-of-court restruc-
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White & Case has elected 33 partners, including four in its global financial restructuring and insolvency practice.
New York-based Scott Greissman
joined the firm in January 2004 and represents potential acquirer Pilot Travel Centers LLC in the Flying J Inc. case.
Michael Shepherd joined the Miami
office of White & Case in 2006.
Thierry Bosly in Brussels is counsel
to interested parties of Lobster Land Sea
Products, creditor Frank Roberts & Sons
Ltd. in the Nucta NV case and lenders to
Plastal Holding AB.
London-based Mark Glengarry has
represented Cordiant Group plc, a steering committee of lenders for JVH Gaming
Group, Deutsche Bank in several restructurings and aircraft finance parties in the
Delta Air Lines Inc. and Northwest Airlines Corp. cases.
Iker I. Arriola Peñalosa in Mexico
City and Carsten Rodemann in Berlin
also have restructuring experience.
Citigroup Inc. may have edged Bank of
America Corp. for top DIP lender in 2009
through Nov. 15 (see story, page 23), but it’s
BofA that ends the year as the hottest postpetition lender.
The Charlotte, N.C., bank provided
$557.5 million in DIP funding in the three
months ended Dec. 10, far outdistancing 3239432 Nova Scotia Co., which lent
C$230 million ($219 million) to AbitibiConsolidated Inc.
General Electric Co. was the most
prolific lender, supplying $41.83 million
through five DIPs. BofA and Credit Suisse
AG, Cayman Islands Branch finished second for their involvement in three loans.
Figures for all the hottest DIP lenders are down sharply since the last time
Bankruptcy Insider checked on March 31.
That’s not surprising, however, since DIP
issuance has tailed off from $14.24 billion
in the first quarter to $2.25 billion for the
three months ended Dec. 10. n
—David Elman
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23 the daily deal T hur s day Dece mber 17 2009
Wresting the reins
With debtors deeply leveraged, prepetition lenders have had firm control of debtor-in-possession lending
D
espite a severe restriction in
credit markets that traces its
roots to the late 2008 bankruptcy filing of Lehman Brothers Holdings
Inc., it has been a record-setting year for
debtor-in-possession financing by almost
any measure, and to be sure, an imaginative one.
For all the talk of a virtually nonexistent DIP lending market, debtors in 2009
had raised 356 DIPs totaling $59.67 billion
through Nov. 15, compared with 300 DIPs
totaling $17.36 billion over the same period a year earlier, according to pipeline.
thedeal.com. (See table, pages 26 to 29.)
Obviously, this year’s numbers are substantially skewed by the mammoth DIPs
lent by the U.S. Department of the Treasury and Export Development Canada in
the megabankruptcies of General Motors
Corp. (which received $33.3 billion in DIP
financing) and Chrysler LLC ($4.96 billion). But even after removing those government-funded cases from the equation,
debtors had secured $21.41 billion in DIP
financing through Nov. 15, still more than
last year’s total and way ahead of the pace
through the same period in 2007 (206
DIPs totalling $13.45 billion) and 2006
(186 DIPs totalling $6.35 billion).
But the raw numbers don’t tell half
of the story. One of the defining aspects
of this bankruptcy cycle is the heavily
layered capital structures debtors enter
Chapter 11 with and how those complicated structures define the real power
brokers in each case.
“The systemic problem is the fact that
the pyramid [of corporate debt] is so broad
at the base, there are so many co-lenders
in each loan, it’s almost like a sociological experiment” trying to get them on the
same page, says Scott Baena, chair of the
restructuring and bankruptcy group at
Bilzin Sumberg Baena Price & Axelrod
LLP. The Miami attorney says in modern
Chapter 11 restructurings a debtor rarely
negotiates directly with the agents for its
close
print
prepetition debt. These agents have essentially been reduced to the role of “ballot-takers,” he says.
Deeply levered debtors also usually
have little or no unencumbered assets
to offer traditional strategic DIP lenders as collateral. Absent a priming battle
in bankruptcy court—a rare occurrence,
but always lengthy and expensive—a DIP
lender cannot move in and prime an existing lender’s security interests.
Add to that a decline in valuations virtually across the board, which leaves a
very slim equity cushion (if there’s one at
“We still haven’t
seen a really true,
new DIP lender,
one that’s looking
for an opportunity
to lend strictly for a
return on capital.”
—Brett Barragate
all) that DIP lenders can look to as security.
The result, regardless of third parties
with the funds and desire to enter the lucrative DIP market, has been a shift to an
era of postpetition financing dominated by
existing lenders, which, more often than
not, happen to be traditional banks with
no real appetite for bankruptcy lending.
For example, not including Treasury
and EDC, Citigroup Inc. was the biggest DIP lender this year through Nov.
15, providing $2.4 billion through seven
loans. Bank of America Corp. is next
with 29 DIPs totaling $2.33 billion, followed by General Electric Co. ($1.12
billion, 22 DIPs), UBS AG ($953.17 million, seven DIPs), Goldman Sachs Group
Inc. ($911.99 million, two DIPs), Wells
Fargo & Co. ($876.83 million through a
back
< Index >
cover
2009 high of 33 DIPs), Deutsche Bank
AG ($856.34 million, seven DIPs) and J.P.
Morgan Chase & Co. ($826.7 million, 11
DIPs).
Since the credit markets dried up, “we
still haven’t seen a really true, new DIP
lender, one that’s looking for an opportunity to lend strictly for a return on their
capital,” says Brett Barragate, co-head of
Jones Day’s financial institutions litigation and regulation group.
Barragate, like many of the bankruptcy
professionals interviewed for this article,
noted that in the rare case when a debtor
could raise a third-party DIP this year, it
usually came from an investor looking to
acquire its assets out of bankruptcy and
using the loan as a bridge to a Section 363
sale.
For example, Sun Capital Partners
Inc. used the strategy to purchase Catterton Partners portfolio company Lang
Holdings Inc. out of bankruptcy. Lang
entered Chapter 11 on July 16 with a $16
million DIP from Sun Capital affiliate Sun
Lang Finance LLC. The Boca Raton, Fla.,
investment firm teamed with Catterton to
form LHI Enterprises Inc. to buy Lang.
Sun Capital credit-bid roughly $15 million
outstanding on its DIP, while Catterton
credit-bid a portion of debt it acquired
from prepetition lender Bank of America.
“The concept of hiring an investment
banker to get the right terms for DIP financing and get [lenders] to compete
against each other” largely no longer exists in the current Chapter 11 landscape,
says Cathy Hershcopf, a partner in Cooley
Godward Kronish LLP’s bankruptcy and
restructuring group.
This dominance of traditional banks in
the market for DIP lending has changed
the landscape of how DIPs are structured.
Refinancing, or rolling up, outstanding
debt into a DIP loan is by no means a new
phenomenon. But in 2009, existing lend-
CONTINUED >
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24 the daily deal T hursday Dece mber 17 2009
< PREVIOUS
ers were as forceful and creative as ever
in rolling up their debt, which gives them
priority above almost all other creditors in
repayment. The end result was not a lot of
bang for the overall buck, so to speak, for
debtors.
The 356 DIPs raised by debtors through
Nov. 15 include $50.37 billion, or 84.4%,
“new money.” Take GM and Chrysler out
of the equation, though, and the remaining
DIPs include $12.11 billion, or just 56.5%,
in new money. (For more on the top newmoney lenders, see page 25.)
In other words, DIP lenders excluding
Treasury and EDC used almost half of their
total DIP commitments to roll up their existing debt. Rolling up large amounts of
debt often does not afford debtors with
enough new capital to survive a Chapter
11 case and often serves only as a means
for existing lenders to keep the lights on
long enough to liquidate their collateral.
Though it filed for Chapter 11 in late
2008, Circuit City Stores Inc. is perhaps the best and well-known example
of the consequences to this practice. The
electronics retailer entered bankruptcy
armed with a $1.1 billion DIP from existing lenders led by BofA, GE Capital Markets Inc. and Wells Fargo Retail Finance
LLC. The size of the DIP was misleading,
however, as it rolled up some $898 million
outstanding on Circuit City’s $1.3 billion
prepetition line of credit.
When Circuit City could not raise $75
million in junior financing as required by
the DIP’s terms—and when it missed revenue projections to boot—its DIP lenders
pulled the plug and forced the chain into
liquidation.
In early 2009, two bankruptcies
brought with them the introduction of a
new, creative way to incentivize lenders
to fund large DIP loans with new capital. Lyondell Chemical Co.’s $8.5 billion
DIP (the second-largest commitment in
2009, behind only GM’s) and Aleris International Inc.’s $1.62 billion DIP both
feature a dollar-for-dollar rollup of prepetition debt.
Lyondell’s DIP includes a $6.5 billion
close
print
term loan, half of which is new funding,
while the remainder rolls up prepetition debt. (The DIP also includes a $1.52
billion revolver, expandable to $2 billion, to replace existing working capital
facilities.)
Similarly, in addition to a $575 million
revolver, Aleris’ DIP rolls up as much as
$540 million in term debt and contains
roughly $500 million in new money.
Such a structure gives lenders incentive to lend new money to a bankrupt
company and provides debtors with
enough capital—and time—to successfully
reorganize.
“What we saw this
year in the way of
these imaginative
devices is a testament to how we
started the year
without [financing] and clawed our
way through it with
incentive-driven
DIPs.” —Scott Baena
“What we saw this year in the way of
these imaginative devices is a testament to
how we started the year without [financing] and clawed our way through it with
incentive-driven DIPs,” Baena says.
On the heels of Lyondell and Aleris’
creative DIPs, it seemed in the beginning
of the year that virtually every bankruptcy
loan with a substantial new-money commitment would include a dollar-for-dollar rollup. ION Media Networks Inc.
entered bankruptcy in May with a $300
million DIP that included $150 million in
new money and rolled up an equal portion
of existing debt. (The broadcast television
station operator ultimately scrapped the
rollup portion of the loan after it met resistance from first-lien lenders not invited
to participate in the rollup, a routine objection when the technique is used.)
back
< Index >
cover
But rather than becoming the new
norm in bankruptcy financings, DIPs with
this structure may be only a sign of the
turbulent times of early 2009.
“The only reason you need a rollup is
that there’s no third-party capital available for a DIP,” says Mark Cohen, head
of restructuring and workout at Deutsche
Bank. “Rollups are a sign of a fractured
market.”
Cohen, who led Deutsche’s team that
participated in Aleris’ DIP, says it is unlikely there will be more dollar-for-dollar
rollups going forward “unless we see another market setback.”
“They are not a normal market feature” but rather a classic example of defensive DIP financing, he says.
While Aleris and Lyondell were able
to persuade their existing lenders to commit new money in bankruptcy by creating
innovative DIP structures, dozens of other companies were forced to consent to
more basic rollups of their debt through
DIP loans. One debtor in particular,
though, became the envy of all bankrupt
companies.
General Growth Properties Inc.,
which owns and operates 200 malls in
44 states, entered Chapter 11 with a $375
million all-new-money DIP from equity
holder Pershing Square Capital Management LP but ultimately found itself
with three prospective lending groups.
Interest in providing GGP with a DIP
was such that the debtor decided to hold
an auction to choose the best proposal, a
scenario unheard of in the current DIP
market and rare at any time.
The Chicago company eventually
chose a $400 million DIP from existing
unsecured creditors led by Farallon Capital Management LLC. The loan, like at
least one other proposal, can be paid back
by converting outstanding debt to equity,
a sign that the lenders on board see value
in a reorganized GGP.
“The fact that there was a potential
equity upside in the DIP set it apart,”
says David Feldman of Gibson, Dunn &
Crutcher LLP, counsel to Farallon in the
CONTINUED >
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25 the daily deal Th ursday De cember 17 2009
< PREVIOUS
ION Media has the option to either pay
back its DIP in cash or convert the facility into a 62.5% equity stake upon exiting
bankruptcy.
That such equity conversions have
crept into DIP agreements this year is a
sign of the times. The conversion gives
debtors something extra to offer in excase. Though GGP had the Pershing DIP
change for the DIP and also helps them
in place when it filed bankruptcy, it did
avoid raising more cash in unfavorable
not draw down from the loan. Instead,
markets to pay down the loan upon exitit used some $209 million in cash collating bankruptcy.
eral to fund operations of its malls
But for those on the bottom of
during the first three weeks of its
bankruptcy’s pecking order, such
case. All the while, GGP solicited
as unsecured creditors, the innorival proposals.
vation can increasingly take them
“The company went out and
Corporate debtors got a government bailout as G-men
out of the money, especially with
cut a deal initially on a DIP that
drove bankruptcy financing with unmatched velocity. The
valuations down virtually across
many parties believed was a rich
U.S. Department of the Treasury took the checkered flag
the board.
deal for the DIP lender. That’s
as the most powerful “new money” DIP lender in 2009
Equity conversions in DIP
why parties that had a stake in
through Nov. 15.
agreements are “really not favored
GGP felt that they could do betTreasury pumped $28.1 billion of high-octane financial
by the court because they come to
ter,” says Feldman, referring to the
fuel into two stalled automakers, Chrysler LLC and Generthe disadvantage of prepetition
Farallon-led group, and the third
al Motors Corp. The government of Canada rode shotgun
creditors who were hoping for
bidder, Goldman Sachs Group
on the car company deals, with its Export Development
some of the equity value,” BarInc., owed about $225 million in
Canada vehicle churning out $10.2 billion in new-money
ragate says. “You’re taking someprepetition debt.
volume.
thing off the table [for the junior
To be sure, GGP was not the
Chasing the federal funds rate, from the private seccreditors], and courts are generonly debtor to enter Chapter 11
tor, were Bank of America Corp., Citigroup Inc. and UBS
ally reluctant” to approve them.
this year with a DIP loan not faAG. Merrill Lynch Capital Corp.’s $812.5 million injection
Cohen says equity convervored by other creditors. But uninto insolvent Lyondell Chemical Co. was the engine that
sions in DIP loans are a product
like most debtors in this current
propelled BofA into third place, which revved up 24 transof debtors’ inability to raise tracycle, GGP had something to offer
actions worth $2 billion. Citi, meanwhile, provided $1.6 bilditional third-party financing in
a third-party lender.
lion through five deals. UBS rounded out the top five with
bankruptcy. Much like dollar-for“The view was that there was
seven deals valued at $945 million. —Neil Malcolm
dollar rollups, he does not expect
enough equity in some of the
to regularly see such features in
properties and some significant
DIPs as credit markets improve.
Top “new money” DIP lenders
unencumbered assets ... and [ex“We’re at the front end of what
Jan. 1–Nov. 15, 2009
tra] cash on the balance sheet” to
I think will be a very good part
No. of
New-money
serve as collateral, Feldman says,
of the cycle,” says Cohen, who
Rank
Lender *
volume
commitments
($mill.)
speaking about Farallon’s interest
expects to see “a wave” of exit fiU.S. Department
in particular.
nancings in 2010.
1 of the Treasury
2
$28,094.0
Despite the competition for
That surge, already building,
2 Export Development Canada
2
10,166.0
its DIP, though, GGP still paid a
would be welcome news to debtsteep price. The loan is priced at
ors and DIP lenders alike. Barra3 Bank of America Corp.
24
1,968.1
LIBOR plus 1,200 basis points (a
gate says that absent a functionhigh but not unheard-of coupon
ing exit financing market, debtors
4 Citigroup Inc.
5
1,588.5
in the first half of the year) and
with no light at the end of the
5 UBS AG
7
945.0
includes a 3.75% exit fee for Fartunnel will continue to be hard
allon.
pressed in raising third-party DIP
6 Goldman Sachs Group Inc.
2
832.5
Most notably, however, Faralfinancing.
lon and the other lenders parThat, of course, would leave
7 General Electric Co.
15
640.9
ticipating in the loan can convert
traditional banks to fill the void as
8 J.P. Morgan Chase & Co.
8
634.9
outstanding amounts on the DIP
they’ve done for the better part of
into either 8% of GGP’s fully di2009.
9 Deutsche Bank AG
6
587.7
luted common stock or 9.9% of
Says Barragate of mainstream
the common stock issued on the
banks dominating the DIP lend10 Wells Fargo & Co.
22
409.6
effective date of a reorganization
ing landscape: “It’s become sort
*Includes commitments by affiliates or units
plan, court filings show. Similarly,
of a fact of life.” n —John Blakeley
Department of finance
close
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< Index >
cover
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Fresh funds “New money” debtor-in-possession financing Jan. 1–Nov. 15, 2009
Commitment
($mill.)
Debtor
% new
money
Filing
date
Debtor
Commitment
($mill.)
% new
money
Filing
date
100.0%
1/2/09
Crescent Oil Co.
$3.3
100.0%
2/7/09
Recycled Paper Greetings Inc.
10.0
100.0
1/2/09
S & K Famous Brands Inc.
13.0
42.3
2/9/09
Interlake Material Handling Inc.
41.5
15.6
1/5/09
Caritas Health Care Inc.
19.6
100.0
2/10/09
Smitty’s Building Supply Inc.
10.5
47.0
1/5/09
SkyMark Holdings Inc.
1.7
100.0
2/11/09
Lyondell Chemical Co.
8,500.0
38.2
1/6/09
Foothills Texas Inc.
2.5
100.0
2/11/09
Lyondell Chemical Co.
75.0
100.0
2/11/09
0.5
100.0
2/11/09
Broadstripe LLC
$15.0
100.0
100.0
1/7/09
Pliant Corp.
Clearwater Natural Resources LP
10.0
100.0
1/7/09
IdentiPHI Inc.
MGP Auburn Gresham LLC
0.8
100.0
1/9/09
Aleris International Inc.
1,615.9
42.8
2/12/09
Retail Pro Inc.
1.3
100.0
1/10/09
Nailite International Inc.
3.0
100.0
2/13/09
Merisant Worldwide Inc.
20.0
100.0
1/11/09
Pacifica of the Valley Corp.
24.6
0.0
2/17/09
Tronox Inc.
125.0
100.0
1/12/09
Cascade Grain
2.0
0.0
2/17/09
Apex Silver Mines Ltd.
35.0
100.0
1/12/09
Forward Foods LLC
4.0
100.0
2/17/09
Shane Co.
10.5
100.0
1/12/09
Flying J Inc.
11.5
100.0
2/18/09
Tarragon Corp.
6.3
100.0
1/12/09
Foamex International Inc.
95.0
59.0
2/18/09
Think Global AS
5.7
100.0
1/13/09
WL Homes LLC
30.9
74.1
2/19/09
Gottschalks Inc.
125.0
100.0
1/14/09
Terra Nostra Resources Corp.
0.1
0.0
2/19/09
3.5
100.0
1/14/09
Smurfit-Stone Container Corp.
0.4
100.0
2/20/09
VeraSun Energy Corp.
110.6
27.7
1/15/09
Blue Note Caribou Mining
0.8
100.0
2/20/09
Pecus ARG Holding Inc.
71.5
6.7
1/15/09
Ritz Camera Centers Inc.
85.0
35.9
2/22/09
Marine Drive Properties Ltd.
2.1
100.0
1/15/09
Philadelphia Newspapers LLC
25.0
100.0
2/22/09
65.0
100.0
1/16/09
Pasadera Country Club LLC
1.2
100.0
2/24/09
160.0
0.0
1/23/09
Everything But Water LLC
11.0
100.0
2/25/09
1.2
100.0
1/23/09
Ittierre SpA
38.3
100.0
2/25/09
750.0
100.0
1/26/09
We Recycle! Inc.
0.0
100.0
2/25/09
5.0
100.0
1/26/09
Summitt Logistics & Brokerage LLC
4.2
100.0
3/2/09
29.2
14.2
1/27/09
100.0
SLS International Inc.
0.6
100.0
3/3/09
0.2
1/27/09
58.0
20.7
1/28/09
Autobacs Strauss Inc.
20.0
100.0
3/3/09
Brighter Minds Media LLC
3.5
0.0
1/29/09
Tahera Diamond Corp.
0.4
100.0
3/3/09
Renew Energy LLC
2.5
100.0
1/30/09
Jameson House Properties Ltd.
4.7
100.0
3/4/09
Global Aircraft Solutions Inc.
1.0
100.0
1/30/09
G.I. Joe’s Holding Corp.
51.2
8.2
3/4/09
Agriprocessors Inc.
25.0
67.8
1/30/09
Magna Entertainment Corp.
62.5
100.0
3/5/09
Ernie Haire Ford Inc.
1.0
100.0
2/3/09
1.3
100.0
3/5/09
235.0
31.9
2/3/09
Right Start Acquisition Co.
2.5
100.0
2/3/09
Innovatier Inc.
0.2
100.0
2/3/09
Wadley Regional Medical Center
Propex Inc.
Hartmarx Corp.
HPG International Inc.
Smurfit-Stone Container Corp.
Rock Well Petroleum Inc.
TallyGenicom LP
Millennium Transit Services LLC
Equity Media Holdings Corp.
Spectrum Brands Inc.
Solstice LLC
Pacific Energy Resources Ltd.
182.7
21.9
3/8/09
St. Mary’s Hospital
20.0
55.0
3/9/09
0.5
100.0
3/9/09
135.0
29.6
3/10/09
Tahera Diamond Corp.
3.9
100.0
3/10/09
Ghost Town Partners LLC
0.5
100.0
3/11/09
North American Scientific Inc.
1.0
100.0
3/11/09
We Recycle! Inc.
Milacron Inc.
ManagedStorage International Inc.
32.9
0.0
2/4/09
On-Site Sourcing Inc.
38.8
100.0
2/5/09
6.7
50.8
2/5/09
80.0
100.0
2/5/09
0.1
100.0
2/5/09
Fluid Routing Solutions
Intermediate Holding Corp.
12.0
100.0
2/6/09
Contech U.S. LLC
7.2
100.0
2/6/09
Bruno’s Supermarkets LLC
4.0
100.0
2/6/09
Qimonda Richmond LLC
Fortunoff Holdings LLC
Strasburg-Jarvis Inc.
5.1
3.2
3/11/09
Scottsdale Auto Salon LLC
0.3
100.0
3/11/09
Biltrite Rubber (1984) Inc.
1.5
100.0
3/12/09
Appalachian Oil Co.
3.4
100.0
3/12/09
60.0
100.0
3/13/09
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< Index >
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Commitment
($mill.)
Debtor
% new
money
Filing
date
Debtor
Commitment
($mill.)
Amerlink Ltd.
$0.2
100.0%
3/16/09
Humboldt Creamery LLC
Drug Fair Group Inc.
40.0
0.0
3/18/09
Wingspeed Corp.
Fairchild Corp.
23.0
13.0
3/18/09
Albidon Ltd.
Fairchild Corp.
4.0
100.0
3/18/09
Tekoil & Gas Corp.
Chemtura Corp.
% new
money
Filing
date
100.0%
4/21/09
1.0
100.0
4/21/09
$3.0
8.8
100.0
4/23/09
23.0
100.0
4/23/09
400.0
78.4
3/18/09
Fairmont Resort Properties Ltd.
4.6
100.0
4/24/09
Greenbrier Hotel Corp.
19.0
100.0
3/19/09
Daufuskie Island Properties LLC
1.5
100.0
4/24/09
Extreme Retail (Canada) Inc.
0.5
100.0
3/19/09
St. Lawrence Homes Inc.
0.8
100.0
4/24/09
Sportsman’s Warehouse Inc.
85.0
100.0
3/20/09
American Community Newspapers LLC
6.0
100.0
3/20/09
Source Interlink Cos.
T H Agriculture & Nutrition LLC
Varig Logistica SA
5.0
0.0
4/27/09
385.0
58.4
4/27/09
7.5
100.0
3/20/09
Phoenix MC Inc.
1.4
100.0
4/27/09
MMC Precision Holdings Corp.
20.0
16.6
3/22/09
Sheldon Good & Co. Auctions Northeast LLC
2.0
100.0
4/29/09
Bi-Lo LLC
125.0
36.0
3/23/09
Mark IV Industries Inc.
3.4
0.0
3/23/09
Chrysler LLC
Active Wallace Group Inc.
Fleetwood Enterprises Inc.
80.0
22.9
3/24/09
Crown Village Farm LLC
Dial-A-Mattress Operating Corp.
0.9
83.3
3/25/09
Abitibi-Consolidated Inc.
Innovation Luggage Inc.
0.4
14.3
3/26/09
Waterworks Inc.
DM Industries Ltd.
10.0
0.0
3/27/09
0.1
100.0
3/27/09
Meadowcraft Inc.
90.0
100.0
4/30/09
4,960.0
100.0
5/1/09
5/1/09
5.0
100.0
100.0
100.0
5/1/09
7.5
100.0
5/3/09
Dewey Ranch Hockey LLC
17.0
100.0
5/5/09
Norwood Promotional Products Holdings Inc.
30.0
59.0
5/5/09
58.0
8.3
3/28/09
Bachrach Acquisition LLC
6.5
100.0
5/5/09
0.4
100.0
3/30/09
Lisbon Valley Mining Co. LLC
18.1
100.0
5/5/09
Zounds Inc.
1.0
100.0
3/30/09
Medico Labs Inc.
0.1
0.0
5/6/09
Medical Intelligence Technologies Inc.
0.6
100.0
3/31/09
AGT Crunch Acquisition LLC
6.0
100.0
5/6/09
TVI Inc.
19.0
100.0
4/1/09
Stock Building Supply Holdings LLC
100.0
100.0
5/6/09
BT Tires Group Holding LLC
27.9
10.8
4/2/09
Crucible Materials Corp.
Zohar Waterworks LLC
3.4
100.0
4/2/09
General Growth Properties Inc.
Palmdale Hills Property LLC
1.8
100.0
4/2/09
St. Lawrence Homes Inc.
0.2
100.0
4/3/09
Fairmont Resort Properties Ltd.
69.4
0.0
5/6/09
400.0
100.0
5/6/09
Forticell Bioscience Inc.
0.6
100.0
5/7/09
F.T. Silfies Inc.
11.9
20.0
5/7/09
Jane & Co.
5.1
19.6
4/6/09
Sencorp
29.8
22.7
5/8/09
Transmeridian Exploration Inc.
0.7
100.0
4/6/09
Badanco Acquisition LLC
16.0
53.1
5/11/09
Indalex Holdings Finance Inc.
86.0
15.8
4/7/09
Roma Foods of Oklahoma Inc.
2.5
80.0
5/11/09
0.1
100.0
4/7/09
Diplomat Construction Inc.
0.2
100.0
5/11/09
30.0
100.0
4/7/09
Hayes Lemmerz International Inc.
200.0
50.0
5/12/09
Tempe Land Co. LLC
43.3
100.0
4/7/09
Energytec Inc.
1.5
100.0
5/13/09
Ultra Stores Inc.
30.0
69.7
4/9/09
Chardon Rubber Co.
3.4
0.0
5/15/09
Strategic Resource Acquisition Corp.
Aventine Renewable Energy Holdings Inc.
Flying J Inc.
Noble International Ltd.
0.5
100.0
4/10/09
Chardon Rubber Co.
0.3
0.0
5/15/09
20.0
100.0
4/13/09
Fatburger Restaurants of California Inc.
2.2
100.0
5/15/09
40.0
50.0
5/17/09
5.0
100.0
5/17/09
32.0
100.0
5/17/09
9.7
100.0
4/15/09
Pacific Ethanol Holding Co. LLC
General Growth Properties Inc.
400.0
100.0
4/16/09
Petrorig I Pte Ltd.
AbitibiBowater Inc.
360.0
100.0
4/16/09
TXCO Resources Inc.
AbitibiBowater Inc.
210.0
0.0
4/16/09
J.G. Wentworth LLC
Denison Foods LLC
0.3
100.0
4/17/09
Ion Media Networks Inc.
Dayton Superior Corp.
10.0
46.5
5/19/09
150.0
100.0
5/19/09
165.0
21.2
4/19/09
Terra Nostra Resources Corp.
0.2
0.0
5/21/09
Sterling Mining Co.
1.0
100.0
4/20/09
Mahalo Energy (USA) Inc.
2.0
0.0
5/21/09
Red Top Rentals Inc.
2.6
100.0
4/20/09
Al Baskin Co.
2.0
100.0
5/21/09
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Commitment
($mill.)
Debtor
% new
money
Filing
date
Commitment
($mill.)
Debtor
% new
money
Filing
date
Rosseau Resort Developments Inc.
$12.8
0.0%
5/22/09
LaVigne Inc.
100.0%
7/9/09
Anchor Blue Retail Group Inc.
20.0
0.0
5/27/09
Cabrini Medical Center
5.0
0.0
7/9/09
Metaldyne Corp.
18.5
100.0
5/28/09
Golfers’ Warehouse Inc.
1.5
1.3
7/9/09
Particle Drilling Technologies Inc.
Caraustar Industries Inc.
General Motors Corp.
$0.1
1.6
100.0
5/30/09
Electroglas Inc.
2.0
0.0
7/9/09
75.0
100.0
5/31/09
TH Properties LP
3.0
100.0
7/9/09
33,300.0
100.0
6/1/09
Clayton Construction Co. Ltd.
1.2
100.0
7/9/09
Butler International Inc.
30.0
32.8
6/1/09
Fraser Papers Inc.
8.1
100.0
7/10/09
Genmar Holdings Inc.
50.0
28.1
6/2/09
Pro-Health LLC
6.0
100.0
7/10/09
Prospect Homes of Richmond Inc.
1.6
100.0
6/2/09
November 2005 Land Investors LLC
8.0
100.0
7/10/09
DTZ Rockwood Inc.
0.4
100.0
6/3/09
Bashas’ Inc.
45.0
0.0
7/12/09
DTZ Rockwood Inc.
0.4
100.0
6/3/09
J.L. French Automotive Castings Inc.
15.0
100.0
7/13/09
Pilgrim’s Pride Corp.
18.0
100.0
6/5/09
RathGibson Inc.
80.0
25.0
7/13/09
Goodcrane Corp.
0.6
100.0
6/5/09
NV Broadcasting LLC
Berean Christian Stores Inc.
2.0
100.0
6/9/09
Flying J Inc.
Nova Holding Clinton County LLC
28.0
100.0
7/13/09
100.0
100.0
7/14/09
2.0
0.0
6/9/09
Santa Fe Holding Co.
4.0
100.0
7/15/09
Crescent Resources LLC
110.0
100.0
6/10/09
Enos Lane Farm Properties LLC
0.1
100.0
7/16/09
Hendricks Furniture Co.
2.5
100.0
6/10/09
Biopure Corp.
0.5
100.0
7/16/09
Heidtman Mining LLC
0.6
100.0
6/12/09
Lang Holdings Inc.
16.0
100.0
7/16/09
Isolagen Inc.
2.5
100.0
6/15/09
TH Properties LP
0.3
100.0
7/16/09
W.C. Wood Corp.
0.4
100.0
6/16/09
West Hawk Energy USA LLC
1.8
100.0
7/20/09
Building Materials Holding Corp.
80.0
0.0
6/16/09
O2Diesel Corp.
0.4
53.5
7/21/09
100.0
48.8
6/17/09
Champion Motor Group Inc.
6.0
100.0
7/22/09
4.0
100.0
6/17/09
Lavatec Inc.
1.0
100.0
7/24/09
Fraser Papers Inc.
20.0
100.0
6/18/09
QSGI Inc.
0.5
100.0
7/24/09
Fraser Papers Inc.
79.0
0.0
6/18/09
Arclin US Holdings Inc.
25.0
100.0
7/27/09
0.0
100.0
6/22/09
Stant Corp.
11.0
100.0
7/27/09
70.0
100.0
6/24/09
Applied Solar Inc.
1.5
0.0
7/28/09
TXP Corp.
0.5
100.0
6/24/09
Station Casinos Inc.
150.0
100.0
7/28/09
G & S Metal Consultants Inc.
15.6
0.0
6/24/09
ProtoStar Ltd.
17.0
100.0
7/29/09
Trilogy Development Co. LLC
0.8
100.0
6/25/09
ProtoStar Ltd.
6.0
100.0
7/29/09
Nexient Learning Inc.
0.9
100.0
6/26/09
Rainbows United Inc.
1.5
100.0
7/30/09
Eddie Bauer Holdings Inc.
Critical Access Health Services Corp.
Quelle GmbH
Bison Buildings Holdings Inc.
25.0
41.7
6/28/09
Element Aluminum LLC
0.5
100.0
7/31/09
TXP Corp.
0.5
100.0
6/29/09
GPS Industires Inc.
1.3
100.0
7/31/09
Pumpkin Patch LLC
3.0
100.0
6/29/09
East Cameron Partners LP
4.0
0.0
8/1/09
Robert Manufacturing Co.
Grede Foundries Inc.
55.0
82.3
6/30/09
Crabtree & Evelyn Ltd.
40.0
100.0
7/1/09
Cooper-Standard Automotive Holdings Inc.
0.1
100.0
7/2/09
Shermag Inc.
20.0
100.0
7/2/09
2.6
100.0
7/3/09
Evident Technologies Inc.
2.7
50.0
Kainos Partners Holdings Co. LLC
1.5
55.8
500.0
Henry Dunay Designs Inc.
Grede Foundries Inc.
Adaltis Inc.
Lear Corp.
Global Safety Textiles Holdings LLC
International Metals & Chemicals Group LP
CCS Medical Inc.
0.9
100.0
8/2/09
200.0
100.0
8/3/09
2.8
100.0
8/3/09
Hill Country Galleria LP
3.7
100.0
8/3/09
15.0
100.0
8/4/09
7/6/09
Solstice LLC
1.5
100.0
8/4/09
7/6/09
Solstice LLC
3.0
100.0
8/4/09
100.0
7/7/09
Evergreen Transportation Inc.
5.0
0.0
8/4/09
25.0
100.0
7/7/09
Aerisa Inc.
0.2
100.0
8/4/09
1.0
0.0
7/7/09
Stinson Petroleum Co.
5.0
100.0
8/4/09
10.0
100.0
7/8/09
5.0
100.0
8/12/09
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Commitment
($mill.)
Debtor
Altra Nebraska LLC
$0.6
% new
money
0.0%
Filing
date
Debtor
Commitment
($mill.)
8/13/09
Questex Media Group Inc.
SkyPower Corp.
15.0
0.0
8/13/09
iGourmet LLC
Tango Grill Inc.
0.1
100.0
8/17/09
Canwest Global Communications Corp.
Avery Environmental Services Inc.
0.2
0.0
8/17/09
PDCC Development LLC
% new
money
Filing
date
100.0%
10/5/09
100.0
10/5/09
94.4
0.0
10/6/09
0.3
100.0
10/7/09
30.0
100.0
10/7/09
$15.0
0.2
0.5
100.0
8/19/09
7677 East Berry Avenue Associates LLP
Chiyoda America Inc.
1.7
100.0
8/19/09
Accuride Corp.
50.0
100.0
10/8/09
Bender Shipbuilding & Repair Co.
5.0
100.0
8/19/09
True Temper Sports Inc.
90.0
11.1
10/8/09
8/19/09
0.9
0.0
10/8/09
Global Charter Services Ltd.
Beech Tree Corp.
0.3
100.0
Sunra Coffee LLC
0.6
100.0
8/21/09
One Twenty Nine LLC
0.8
100.0
10/8/09
Opus South Corp.
4.4
100.0
8/24/09
Tavern on the Green LP
6.5
7.7
10/8/09
150.0
100.0
8/24/09
Bender Shipbuilding & Repair Co.
6.0
100.0
10/12/09
Cabi Downtown Inc.
2.0
100.0
8/25/09
Whittaker Builders Inc.
1.0
100.0
10/15/09
South Louisiana Ethanol LLC
0.1
100.0
8/25/09
PJC Technologies Inc.
3.0
0.0
10/19/09
FormTech Industries LLC
8.5
100.0
8/26/09
Taylor, Bean & Whitaker Mortgage Corp.
25.0
100.0
10/21/09
Johnson Broadcasting Inc.
3.0
100.0
8/27/09
Erickson Retirement Communities LLC
20.0
100.0
10/22/09
7677 East Berry Avenue Associates LLP
15.0
100.0
8/28/09
LDG South LLC
8.4
100.0
10/23/09
0.8
100.0
8/28/09
LDG South LLC
0.3
100.0
10/23/09
20.0
100.0
8/28/09
Arena Football League LLC
0.5
100.0
10/23/09
0.1
100.0
10/23/09
10/26/09
Reader’s Digest Association Inc.
TH Properties LP
Commercial Capital Inc.
Nukote International Inc.
26.0
15.4
9/1/09
Metcalf Paving Co.
Cynergy Data LLC
25.0
100.0
9/1/09
FairPoint Communications Inc.
75.0
100.0
Cynergy Data LLC
7.5
100.0
9/1/09
Express Energy Services Operating LP
20.0
100.0
10/27/09
150.0
100.0
10/28/09
Alternative Distribution Systems Inc.
3.3
0.0
9/2/09
Visteon Corp.
Friar Tuck Inn of the Catskills Inc.
0.6
100.0
9/2/09
CanArgo Energy Corp.
1.2
100.0
10/28/09
GigaBeam Corp.
1.0
0.0
9/2/09
All Land Investments LLC
0.1
100.0
10/29/09
Archangel Diamond Corp.
0.4
100.0
9/3/09
Recticel Interiors North America LLC
10/29/09
Maxtech Manufacturing Inc.
1.9
0.0
9/8/09
CIT Group Inc.
PNG Ventures Inc.
2.0
0.0
9/9/09
ART Advanced Research Technologies Inc.
Georgetown Golf Club Inc.
0.2
100.0
9/11/09
TH Properties LP
Tana Seybert LLC
6.4
15.6
9/11/09
Lazy Days RV Center Inc.
Downey Regional Medical Center-Hospital Inc.
15.0
100.0
9/14/09
CrimeCog Technologies Inc.
Perpetua-Burr Oak Holdings of Illinois Inc.
0.3
100.0
9/14/09
Lakota Resources Inc.
0.6
100.0
9/14/09
Barzel Industries Inc.
30.0
38.5
Aurora Oil & Gas Corp.
3.0
Sandab Communications LP
0.5
CMR Mortgage Fund II LP
6.0
Velocity Express Corp.
14.0
Action Motors Corp.
0.1
Schwing America Inc.
4.6
Vectrix Corp.
0.3
Jolt Co.
1.0
100.0
Coastal Plains Pork LLC
1.0
100.0
PS America Inc.
2.6
100.0
PTC Alliance Corp.
Fountain Powerboat Industries Inc.
10.0
100.0
500.0
100.0
11/1/09
1.1
100.0
11/2/09
2.1
100.0
11/2/09
65.0
66.2
11/5/09
0.7
0.0
11/6/09
Coharie Hog Farm Inc.
1.5
100.0
11/6/09
Teton Energy Corp.
0.8
0.0
11/8/09
9/15/09
Gemcraft Homes Inc.
5.0
100.0
11/9/09
100.0
9/17/09
Wilkes Bashford Co.
0.7
100.0
11/9/09
100.0
9/23/09
NutraCea Corp.
6.8
47.1
11/10/09
100.0
9/23/09
Sea Launch Co. LLC
12.5
100.0
11/10/09
46.4
9/24/09
Premium Protein Products LLC
0.3
100.0
11/10/09
100.0
9/25/09
Michael Day Enterprises Inc.
10.5
0.0
11/10/09
100.0
9/28/09
Gemcraft Homes Inc.
25.0
35.2
11/11/09
100.0
9/28/09
Gemcraft Homes Inc.
7.0
0.0
11/11/09
9/28/09
South Texas Oil Co.
1.5
100.0
11/12/09
9/28/09
Amelia Island Co.
5.0
100.0
11/13/09
9/30/09
Standard Forwarding Co.
1.0
100.0
11/13/09
30.0
100.0
11/13/09
80.0
50.0
11/15/09
15.0
100.0
10/1/09
YL West 87th Holdings I LLC
1.5
100.0
10/1/09
Champion Enterprises Inc.
Total DIP: $59.7 BILL. Total new money: $50.4 BILL. % new money: 84.4%
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Time to fly
The exit financing market loosened as 2009 progressed, with commitments and participants increasing, prices dropping
D
ebtor-in-possession loans often
get much of the publicity in bankruptcy, as in most cases a company will hold off filing for Chapter 11 until
it can get one and then trumpet the commitment. But as the recession spawned an
outright financing crisis in late 2008 and
early 2009, exit financings garnered just as
much of the spotlight.
Indeed, once the economy went south,
many debtors found themselves in a panicked state: trapped in bankruptcy and unable to get the financing needed to escape.
But a few things about the exit financing
market have become clear at year’s end.
First, the market has become more robust, with debtors now having a multitude
of potential lenders compared with the
last quarter of 2008. Second, lenders have
loosened the purse strings a bit, with bankruptcy pros noting that pricing on financings has dipped. And third, while debtors
these days have found it a bit easier to cobble together enough financing to bust out
of Chapter 11, those loans also have started
to contain more new money than they did
at the onset of 2009—a trend those in the
industry feel will continue.
Talk to bankruptcy attorneys about the
crisis in the fallout of the Lehman Brothers Holdings Inc. crash, and they will
likely tell you that for any company filing
for Chapter 11 in the fourth quarter of 2008
or early 2009, exit financing was likely a
pipe dream. Even DIP financing—among
the most short-term and lower-risk investments—was hard to come by.
“There is a world of difference between
the beginning of the year and now,” says
Jay Goffman, the co-head of Skadden,
Arps, Slate, Meagher & Flom LLP’s
global restructuring group. “What you saw
last fall was all the normal buyers for [exit
financing debt], such as hedge funds and
private equity funds—none of them were
buying anything new. Every one of them
panicked, so the whole lending process
came to a grinding halt.”
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One investment banking source who
requested anonymity recalls trying to obtain DIP financing for an ethanol plant operator in January and being unable to find
a taker despite contacting more than 50
“reputable” sources.
“Everyone was on cash collateral,” the
banker says. Because debtors were using
what typically is a short-term solution,
“you need to have an asset sale as opposed
to doing [a Chapter 11 plan and] exit loan.”
According to pipeline.thedeal.com (see
table, page 32), the exit financing market
was nearly frozen at the start of the year,
with only five debtors in January and six in
February securing commitments for loans,
notes, swaps for new debt, equity infusions
or rights offerings of equity. In comparison,
12 debtors in September and 14 in October
obtained commitments.
In early 2009, “It was hard to find a
situation where someone who wasn’t already in the deal wasn’t spearheading the
[DIP or exit] financing, either for defensive
purposes or strategic purposes,” says Steven Levine, the leader of Brown Rudnick
LLP’s finance practice group.
Bankruptcy pros point to two key fundings early in the year as signs that the investment community had started to get
back into exit financings. The first was
Quebecor World (USA) Inc.’s $800 million
exit loan from lenders led by Credit Suisse Securities (USA) LLC. The Feb. 22 financing was not only the largest of the year
to that point—and by a wide margin—but it
also contained $260 million in new money
(also the most substantial) and, one source
contends, was some 75% oversubscribed.
Another example of the thaw came
from Charter Communications Inc.’s
financing package. Though the cable company only recently closed on the funding
and emerged from Chapter 11 on Nov. 30,
Charter locked up the terms of a commitment for as much as $2 billion in equity
from bondholders in March—a total that
eventually came in at roughly $1.6 billion.
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(The company also issued $1.77 billion in
new notes to replace old note debt, giving
Charter $3.37 billion in exit financing.)
Skadden’s Goffman, who represented
Vulcan Inc., the investment vehicle of
Charter chairman and controlling shareholder Paul Allen, says Charter’s financing
is “a good example of the fact that lending
institutions and funds are feeling better
about the market, better about the economy, and the funds they sell the debt to have
come back to the marketplace.”
Indeed, that change is reflected in the
type of lenders that have been providing
exit financing. The shift that has come—
and that, Goffman says, will become more
evident next year—is an increase in the
amount of both new money in financings
and the amount of outside sources taking
part in them. (See page 31 for more on the
top new-money exit lenders in 2009.)
The investment banking source recalls,
for example, seeing the same “three or
four” lenders involved in just about every
exit financing deal. That recollection is illustrated by the sheer amount of financings
that came from prepetition and DIP lending groups. Of the 93 distinct commitments
from lenders through Nov. 15, roughly half
were offered by prepetition lenders. In addition, major traditional lenders J.P. Morgan Chase & Co. ($4.62 billion), Bank
of America Corp. ($1.65 billion), Wells
Fargo & Co. ($1.5 billion), General Electric Co. ($1.27 billion) and Credit Suisse
($905.25 million) provided the most exit
financing for the period.
Only two financings that closed in the
first four months of the year—those given
to Wellman Inc. and Yellowstone Mountain Club LLC—came from lenders that
were neither a prepetition lender nor a DIP
lender. By comparison, 13 such financings
took place between July and November.
What constitutes progress, however,
continues to vary on a case-by-case basis.
CONTINUED >
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31 the daily deal Th urs day December 17 2009
< PREVIOUS
traditional variety, Skadden’s Goffman
believes that a tool showing up sparingly
in the tables—rights offerings—is on the
verge of becoming much more prominent.
Just nine commitments through Nov. 15
included a rights offering as a component,
and none of them were even officially
planned—let alone consummated—until
mid-March, with Tropicana Entertainment LLC’s twin reorganization plans. A
plan for certain Tropicana debtors included a $75 million rights offering, and the
plan for the remaining debtors called for a
rights offering of unspecified size as well.
Both were confirmed May 5.
But Goffman says that a number of
rights offerings are on their way in 2010.
“A lot of the deals that are being done
now [have] some form of rights offering
tied in with debt financing,” he says.
Certainly, the merits of rights offerings
appear to be debatable. Brown Rudnick’s
Levine, for example, says that if a company
can afford to sustain debt at a comfortable
level, he might prefer that as opposed to
bringing in new investors through a rights
Brown Rudnick’s Levine recalls, for exoffering. The investment banking source is
ample, working on the then-pending bankmore blunt, believing it to be “silly” to hold
ruptcy of middle-market retailer Walking
one coming right out of bankruptcy court.
Co., where the key parties discussed the
“If you’re really ready to be public again,
terms of not only DIP financing but also
go public in a year,” he says. “They always
exit financing.
seem a little forced to me.”
“In the last couple of years, those conGoffman, however, views rights offerversations tended to be struggles where
ings much more positively.
the lender would be acknowledging that
“It’s better to have less debt and more
in their mind, the company had no real
cushion built into operations in case your
prospects for reorganization and would
base projections don’t turn out,” he says.
be pushing the company towards a liqui“When you’re trying to raise debt financdation,” he says. “It’s [specific] to this paring, it’s a lot easier to sell bonds in the marticular retailer, but it’s a sign that things are
ketplace if someone is putting their money
changing.”
where their mouth is [and buying equity].
Another broader change bankruptcy
It sends the right message.”
pros point out is a markdown in the pricOne message this year’s exit financings
ing of exit financings. Levine explains that
convey is a lack of new money. Again, many
this is evident in the Six Flags Inc. bankbelieve that as the economy rebounds, inruptcy. Levine, who represents the official
vestors will start to buy debt of emerging
committee of unsecured creditors, notes
companies. In 2009, however, new money
that Six Flags entered bankruptcy June 13
in exit loans accounted for just 25.7% of the
with prepetition lenders ready to
total commitments.
provide a $600 million term loan
To be sure, there remains the
priced at either LIBOR plus 700
perhaps special case of General
basis points or prime plus 750 basis
Motors Corp., which has a nearly
points. That loan, later included in
J.P. Morgan Chase & Co. is flying high. The bank alighted
$8.25 billion exit financing coma July 22 reorganization plan filed
at the top of the new-money exit financing league table
mitment, according to pipeline.
by lead debtor Premier Internawith a lofty $1 billion in volume on 10 deals. The $820.9
thedeal.com, or more than 25%
tional Holdings Inc., has not surmillion cargo J.P. Morgan provided auto parts maker Lear
of the total for the year. Motors
vived further revisions.
Corp. represented its largest transaction.—Neil Malcolm
Liquidation Co.—the estate of
Instead, the latest version of
the carmaker, commonly called
the term loan, now $650 million,
old GM—has a $1.18 billion windis priced at LIBOR plus 425 basis
down facility, and the new GenTop “new money” exit lenders
Jan. 1–Nov. 15, 2009
points, with a 2% floor, and has
eral Motors Co. assumed roughly
“lots of banks very interested” in
$7.08 billion in DIP debt when
No.
of
New-money
Lender *
signing up for it, he says. (A $150
it acquired the debtor’s operacommitments volume ($mill.)
million revolver shares the same
tions. As the loans are entirely old
1 J.P. Morgan Chase & Co.
10
$1,007.2
interest rate.)
money, they drag the percentage of
Overall, according to pipeline.
new money for all exit financings
2 Bank of America Corp.
5
605.7
thedeal.com, maximum spreads
downward. Even if the GM debt
3 Apollo Investment Corp.
3
341.8
on exit financings have dropped
were completely wiped out of the
4 Credit Suisse Group
3
288.9
from 1,650 points over LIBOR in
table, however, the figure would
the first half of the year to 1,200
only jump to 35.7%—further evi5 Barclays plc
4
281.7
points over LIBOR in the second
dence that if the shift bankruptcy
6 General Electric Co.
7
275.0
half through Nov. 15. Similarly, the
pros are projecting comes to pass,
highest spread above prime has
it stands to completely revamp the
7 FMR LLC
2
228.8
dropped from 1,550 in the first half
tables next year.
Oaktree Capital
8 Management LP
2
183.1
to 1,100 in the second.
In the end, that can only mean
As for the types of financings
good
things for debtors and their
*Includes commitments by affiliates or units
provided, while most are of the
attorneys. n —Ben Fidler
Lear jet
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FLIGHT CAPITAL “New money” exit financing Jan. 1–Nov. 15, 2009
Commitment
($mill.)
Debtor
% new
money
Debtor
1/7/09
Beaudry RV Co.
Trump Entertainment Resorts Inc.
Mecachrome International Inc.
CommerceConnect Media Holdings Inc.
Trump Entertainment Resorts Inc.
Kirk Corp.
Kirk Corp.
Pliant Corp.
Chiyoda America Inc.
Z Gallerie Inc.
Amaravathi LP
MagnaChip Semiconductor Finance Co.
Think Global AS
Baseline Oil & Gas Corp.
Hawaiian Telcom Communications Inc.
Hawaiian Telcom Communications Inc.
TVI Corp.
Archangel Diamond Corp.
PNG Ventures Inc.
Palmdale Hills Property LLC
Star Tribune Holdings Corp.
Energy Partners Ltd.
Energy Partners Ltd.
Arclin US Holdings Inc.
Crusader Energy Group Inc.
Rhodes Cos. LLC
Flying J Inc. (Big West Oil LLC)
Building Materials Holding Corp.
Bi-Lo LLC
Aurora Oil & Gas Corp.
Accuride Corp.
Z Gallerie Inc.
BioBased Technologies LLC
Fremont General Corp.
NTK Holdings Inc.
Lear Corp.
DBSD North America Inc.
Eurofresh Inc.
Idearc Inc.
Lear Corp.
Lazy Days RV Center Inc.
Premier International Holdings Inc.
Antioch Co.
$4.0
Key Plastics LLC
25.0
100.0
1/29/09
Pittsburgh Corning Corp.
12.0
0.0
1/29/09
Gwenco Inc.
2.0
0.0
1/29/09
Wellman Inc.
35.0
100.0
1/31/09
Yellowstone Mountain Club LLC
75.0
100.0
2/3/09
1.3
0.0
2/3/09
Buffets Inc.
304.3
0.0
2/9/09
BearingPoint Inc.
402.0
5.3
2/18/09
25.0
0.0
2/22/09
800.0
32.5
2/22/09
33.0
0.0
3/5/09
1.0
100.0
3/10/09
Tropicana Entertainment LLC
75.0
100.0
3/11/09
15.0
100.0
3/11/09
1.0
100.0
3/19/09
Cross Lake Minerals Ltd.
Quebecor World (USA) Inc.
Comfort Co.
Waterbrook Peninsula LLC
Arbios Systems Inc.
Motor Coach Industries International Inc.
0.0%
Filing
date
230.0
100.0
3/20/09
Charter Communications Inc.
3,370.0
47.5
3/27/09
Smitty’s Building Supply Inc.
14.5
27.6
4/3/09
1.0
100.0
4/3/09
Special Devices Inc.
15.0
100.0
4/8/09
Special Devices Inc.
16.5
100.0
4/8/09
Brotman Medical Center Inc.
6.0
100.0
4/14/09
Solution Technology International Inc.
Utah 7000 LLC
40.0
100.0
4/20/09
200.0
0.0
4/27/09
785.0
0.0
4/27/09
150.0
46.7
5/5/09
Stock Building Supply Holdings LLC
125.0
100.0
5/6/09
Tricom SA
25.5
100.0
5/7/09
LandSource Communities Development LLC
280.0
100.0
5/13/09
SemGroup LP
800.0
31.3
5/15/09
1.0
100.0
5/28/09
5/31/09
AFC Acquisition Corp.
Caraustar Industries Inc.
75.0
0.0
East Cameron Partners LP
35.0
100.0
6/3/09
Bally Total Fitness Corp.
89.0
43.8
6/10/09
242.0
2.9
6/15/09
218.1
0.0
6/15/09
Journal Register Co.
75.0
0.0
6/18/09
150.0
0.0
6/18/09
Metromedia Steakhouses Co. LP
19.8
23.6
6/19/09
6/23/09
30.0
100.0
Lisbon Valley Mining Co. LLC
2.4
100.0
6/23/09
Creative Loafing Inc.
1.0
100.0
6/30/09
General Motors Corp.
8,247.5
0.0
7/3/09
7.0
100.0
7/8/09
Tricom SA
NV Broadcasting LLC
Pomare Ltd.
WCI Communities Inc.
LandSource Communities Development LLC
Ultra Stores Inc.
28.0
0.0
7/13/09
2.0
100.0
7/15/09
560.0
0.0
7/17/09
13.0
100.0
7/20/09
326.0
34.6
7/24/09
30.0
0.0
7/28/09
Commitment
($mill.)
$50.0
12.5
113.9
89.0
65.0
500.0
1,150.0
225.0
3.5
0.5
193.0
8.4
22.0
150.0
2.0
35.0
47.0
30.0
300.0
50.0
16.0
1.3
5.5
12.5
150.0
5.0
100.0
25.0
125.0
60.0
30.0
35.0
50.0
61.8
435.0
103.5
105.0
349.1
45.0
116.5
140.0
2.0
4.3
24.0
1,000.0
600.0
52.8
35.0
2,750.0
550.0
65.0
1,400.0
Total exit: $29.5 BILL. Total new money: $7.6 BILL. % new money: 25.7%
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< Index >
% new
money
70.0%
44.0
100.0
100.0
7.7
2.2
0.0
100.0
100.0
100.0
100.0
100.0
100.0
0.0
100.0
100.0
100.0
16.7
0.0
100.0
0.0
70.4
0.0
100.0
0.0
100.0
0.0
100.0
100.0
100.0
100.0
100.0
0.0
0.0
100.0
100.0
0.0
56.4
100.0
60.1
100.0
100.0
100.0
100.0
0.0
100.0
100.0
100.0
0.0
100.0
0.0
53.6
Filing
date
7/30/09
7/31/09
8/3/09
8/4/09
8/4/09
8/4/09
8/4/09
8/4/09
8/14/09
8/14/09
8/17/09
8/19/09
8/19/09
8/24/09
8/24/09
8/25/09
8/27/09
8/28/09
8/28/09
8/28/09
8/31/09
9/3/09
9/9/09
9/12/09
9/12/09
9/16/09
9/17/09
9/21/09
9/21/09
9/21/09
9/22/09
9/23/09
9/25/09
9/25/09
9/29/09
10/1/09
10/5/09
10/5/09
10/7/09
10/8/09
10/8/09
10/8/09
10/9/09
10/13/09
10/21/09
10/23/09
10/26/09
10/28/09
10/30/09
11/2/09
11/5/09
11/7/09
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Buyout, boom
Some 103 private equity-backed companies exploded into bankruptcy in 2009, but the filings slowed as the year wore on
F
or private equity-backed bankruptcies in 2009, the story, as it
was in so many other areas, was
liquidity.
Cheap and available debt fueled many
of the leveraged buyouts that later went
bust, and a modest improvement in liquidity curtailed filings as the year progressed.
Some 103 PE portfolio companies entered bankruptcy protection this year
through Nov. 15, from greeting card company Recycled Paper Greetings Inc. on
Jan. 2 to upstate New York retail chain
Patrick Hackett Hardware Co. on Nov.
10. (See table, pages 35 to 37.)
Companies overleveraged from their
PE buyouts in the final boom years of
2006 and 2007, when debt was easy and
cheap, faced the music this year as their
business assumptions didn’t pan out in
the credit crisis.
Twenty-seven of the PE deals that
went bust this year were done in 2007,
and 22 were done in 2006. As a result, the
two years account for more than 47% of
the buyouts that landed in bankruptcy. A
further 17 PE deals that were forced into
bankruptcy in 2009 took place in 2005
and 11 in 2004, according to pipeline.
thedeal.com.
Seventeen of the buyouts gone bust
were announced in 2003 or earlier, while
nine had their roots in 2008 or this year.
“It is not a coincidence” that many of
the deals took place in 2006 and 2007,
says financial adviser Scott Peltz of RSM
McGladrey Inc. “There was a significant
amount of liquidity and debt available.”
According to bankruptcy and restructuring adviser Andrew Horrocks of Moelis & Co. LLC, in 2006 and 2007, “the debt
financing markets were so conducive to
buyout funds that they could borrow significant amounts of money at low costs. It
was an accepted market practice to have
leverage levels on companies that turned
out to be unsustainable.”
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“The terms associated with the debt
were highly favorable to the borrowers,”
Horrocks adds. As an example, he points
to lenders frequently not demanding covenant protection on their debt.
One example of a company crumbling
under its debt was casino operator Station Casinos Inc., owned by Colony
Capital LLC and members of the founding Fertitta family. Colony Capital, Station chairman and CEO Frank J. Fertitta
III and former vice chairman and president Lorenzo J. Fertitta acquired the Las
Vegas company in an $8.8 billion buyout,
first announced in 2006. Station, however, couldn’t maintain its debt when the
economy tanked and filed for Chapter 11
protection on July 28.
A drop-off in revenue as consumer
spending slumped was responsible for
the hardest-hit industries—retail, media,
automotive, and consumer and household products—bankruptcy attorney
Brett Barragate at Jones Day says.
Several PE-backed media companies—
including Yucaipa Cos. LLC-owned
Source Interlink Cos.; NV Broadcasting LLC, whose equity was held by Arlington Capital Partners LP when it
went bankrupt; and Alta Communications-owned Bluewater Broadcasting
Co. LLC—were among the casualties this
year.
In another example, newspaper publisher Star Tribune Co. filed for bankruptcy protection Jan. 15. Equity owner
Avista Capital Partners was wiped out
when the company exited Chapter 11 on
Sept. 28, after the debtor swapped its $393
million in secured debt led by Credit Suisse Group’s Cayman Islands branch for
95% of its reorganized stock.
Senior managing director Scott Winn
of Zolfo Cooper LLC, however, says he
sees the list of industries forced to file
for bankruptcy protection as all over the
map. “It’s a greater function of what the
[PE] deal looked like than how the indus-
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< Index >
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try was doing,” the bankruptcy adviser
says.
When a PE firm has a portfolio company go bankrupt, it sometimes already
has recovered a portion or all of its money through dividend recapitalizations. In
such a move, a company incurs new debt
to pay a dividend to private investors or
shareholders.
Whether that has happened depends
on how old the deal is, Winn says—the
newer the deal is, the less likely it is that
an LBO sponsor has taken its money off
the table.
But even if the PE firm has recovered
its investment, Winn says, bankruptcy
can still hurt because the equity holders
never know what sort of causes of action
creditors might try to use against the firm
as a negotiation tool. He adds that PE
firms also try to avoid having the black
mark left by bankruptcy on their portfolios.
Out of the PE-backed bankruptcies
in 2009, Sun Capital Partners Inc. had
the most, with eight portfolio companies filing for bankruptcy. H.I.G. Capital
LLC and distressed-debt affiliate Bayside
Capital Inc. were next with four portfolio
companies in total entering bankruptcy
protection, and affiliates of CVC Capital
Partners Ltd., Goldman Sachs Group
Inc. and Lone Star Funds each were involved in three filings.
An inside source with deep knowledge of the turnaround investment industry, who asked not to be named, says
Sun Capital buys fragile companies, with
about 40% losing money and the remainder being unhealthy companies.
The source also notes that Sun Capital
buys a lot of companies, and the percentage that eventually go bankrupt is well
within the PE norm of 10% to 15%.
PE-backed bankruptcies as a whole
started with a bang in 2009, with 40 in the
CONTINUED >
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34 the daily deal Th ursday De cember 17 2009
< PREVIOUS
first quarter and 30 in the second quarter,
but as the year dragged on, filings slowed
down to 22 in the third quarter and just
11 in the fourth as of Nov. 15, according to
pipeline.thedeal.com.
Since then, however, six more portfolio companies have filed for bankruptcy:
mattress maker Simmons Bedding Co.,
owned by Thomas H. Lee Partners LP;
Cravey, Green & Whalen Inc.’s Arch
Aluminum & Glass Co.; Quad-C Management Inc.-controlled lighting fixture
maker QHB Holdings LLC; bookseller
Borders (UK) Ltd., a portfolio company of
Valco Capital Partners; building products maker Ames Holding Corp., controlled by Aurora Capital Group; and
plumbing supplies maker Jones Stephens
Corp., owned by Cortec Group Inc.
Several factors have led to the slowdown, restructuring professionals say.
Jones Day’s Barragate believes it’s
due to a “miraculous recovery of the loan
market and the high-yield bond market.”
The latter has allowed distressed companies to issue new bonds or refinance existing bonds.
Since companies are now able to refinance or extend the maturity of their
debt, the rate of bankruptcies has fallen,
Barragate adds.
Peltz says that while there has been
some improvement in the economy and
liquidity, firms are willing to hold off on
bankruptcies in the hope that the economy improves further and things will get
better.
PE firms are letting their portfolio
companies “limp along because there are
few viable exit strategies today,” Peltz
says, adding that firms are looking for improvements in the economy as well as the
flow of capital and values.
Zolfo Cooper’s Winn points out that
there is little upside to a filing for a PE
firm. Entering bankruptcy is always the
last resort and something that the equity
holders try to avoid, he says.
Portfolio companies are only put into
bankruptcy protection when the alternative for the PE firm is to continue to
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support a company that is failing, Winn
says, adding that the equity holder would
much rather amend the portfolio company’s debt or do an out-of-court restructuring than file for bankruptcy—actions
that are on the table more often now than
at the beginning of 2009.
PE firms “would rather do something
out of sight ... than publicly,” he says.
“Amendments and extensions [allow the
PE firm to keep] kicking the can down the
road and putting the problem off to another day in the hope that there will be
a recovery and the [portfolio company]
PE firms are only
putting portfolio
companies into
bankruptcy
protection when
the alternative is
to continue to
support a company
that is failing.
can grow back into their balance sheet on
some level.”
Moelis’ Horrocks agrees PE firms will
put off dealing with a problem as long as
they can. “If a company has a broken balance sheet but no covenant issues or no
maturities, there is no incentive for equity investors to step forward and fix the
problem if time might bail them out,” he
says.
Lenders and equity holders often have
different ideas about when a company’s
problems should be dealt with. Lenders want the issues solved quickly before
there is a further destruction of value,
while equity holders want to wait, hoping
that things will rebound, Horrocks says.
“Dealing with the problem crystallizes
the valuation of the business at that moment in time. If you own the equity and
you don’t have to crystallize the loss right
now, why not wait?” Horrocks asks.
And when the debt is covenant-lite,
as in many deals struck at the top of the
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< Index >
cover
market, lenders can’t force equity holders
to deal with the problem.
In these covenant-lite deals, “lenders
gave up the only hammer that they had
to force equity to come to the table. The
companies are overleveraged, and the
creditors can’t do anything but worry,”
Horrocks says.
A second source, who asked not to be
named, points to several overleveraged
covenant-lite deals whose performance
is way off in this cycle, such as Free
scale Semiconductor Inc., owned by
Blackstone Group LP; Kohlberg Kravis
Roberts & Co.’s First Data Corp.; and
auto parts maker Allison Transmission
Inc., owned by Carlyle Group and Onex
Corp.
The debt in these deals lacks traditional covenants, so lenders have no way
of forcing equity holders to come to the
table to restructure their debt, the source
says.
There is one final reason, however, that
PE-backed filings have slowed down.
The first source says PE firms may be
holding off on bankruptcy filings because
they are raising money for new funds.
Instead of taking on the bad publicity of
a filing, firms instead amend and extend
the debt of their portfolio companies so
they can live another day.
Winn agrees that one of the reasons
PE firms may be avoiding bankruptcy is
to facilitate fundraising, but he adds that
the only reason portfolio companies can
avoid bankruptcy is because their owners are able to amend their debt outside
of bankruptcy.
The slowdown is “not because the PE
funds are raising money right now, but
because they are hoping to raise money
and would rather not have a loss in their
current portfolio, if they can wait to incur
that until after they fundraise,” Horrocks
says.
“Many of the PE firms that plan to
fundraise are targeting to raise funds in
the next 12 to 24 months,” he concludes.
“There is a bias out there that if they can
put off a loss in the current portfolio, it
would be wise to do that.” n
—Jamie Mason
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Lost leverage Private equity-backed bankruptcies Jan. 1–Nov. 15, 2009
PE firm
Debtor
Buyout
ann. date
Bankruptcy
filing date
Recycled Paper Greetings Inc.
Monitor Clipper Partners LLC
11/11/05
1/2/09
Interlake Material Handling Inc.
Wynnchurch Capital Ltd.
12/28/07
1/5/09
Waterford Wedgwood plc
Lazard Alternative Investments LLC/Corporate Partners II
3/6/06
1/5/09
MSD Capital LP, Pegasus Capital Advisors LP
2/3/00
1/9/09
Star Tribune Holdings Corp.
Avista Capital Partners LP
3/5/07
1/15/09
Specialty Motors Group Holding Corp. (Von Weise Corp.)
Sun Capital Partners Inc.
12/4/07
1/16/09
Wall Homes Inc.
Jen Partners LLC, Warburg Pincus LLC
4/14/05
1/19/09
Blooming Marvellous Ltd.
Arev Securities hf
8/26/07
1/28/09
Edscha AG
Carlyle Group
11/12/02
2/2/09
Right Start Acquisition Co.
Hancock Park Associates
12/24/03
2/3/09
Maerklin Holding GmbH
Goldman Sachs Group Inc., Kingsbridge Capital Advisors
3/20/06
2/4/09
Lone Star Funds
12/23/04
2/5/09
Fortunoff Holdings LLC
NRDC Equity Partners LLC
2/4/08
2/5/09
Fluid Routing Solutions Intermediate Holding Corp.
5/15/07
2/6/09
Appalachian Oil Co.
Titan Global Holdings Inc.
5/2/06
2/9/09
Barton-Cotton Inc.
American Capital Strategies Ltd.
9/6/07
2/9/09
Muzak Holdings LLC
Abry Partners LLC
2/1/99
2/10/09
Aleris International Inc.
Texas Pacific Group
8/8/06
2/12/09
Forward Foods LLC
Emigrant Capital Corp.
9/18/06
2/17/09
Everything But Water LLC
Bear Growth Capital Partners LP
8/31/06
2/25/09
Regal Jets LLC (JetDirect Aviation Inc.)
Brantley Partners, HSBC Capital (USA) Inc., AIG Global Investment Group
4/20/06
2/25/09
Parts Holding; Autodis (Autodistribution SA)
Investcorp
1/6/06
3/2/09
Robbins Bros. Corp. (William Pitt Inc.)
Weston Presidio, Dorset Capital Management LLC
1/4/05
3/3/09
G.I. Joe’s Holding Corp.
Gryphon Investors
1/25/07
3/4/09
Lambertson Truex LLC (Samsonite Corp.)
Bain Capital LLC, CVC Capital Partners Ltd., Ontario Teachers’ Pension Plan
7/5/07
3/5/09
Plastal Holding AB
Nordic Capital
12/21/04
3/5/09
Sunset Aviation Inc. (JetDirect Aviation Inc.)
Brantley Partners, HSBC Capital (USA) Inc., AIG Global Investment Group
6/7/07
3/6/09
GCP CT School Acquisition LLC (Connecticut School of Broadcasting Inc.)
DLJ Growth Capital Partners
1/12/06
3/6/09
Milacron Inc.
Bayside Capital Inc.
10/3/07
3/10/09
Masonite Corp.
Kohlberg Kravis Roberts & Co. LP
12/22/04
3/16/09
Drug Fair Group Inc.
12/5/05
3/18/09
Seidler Equity Partners
11/28/08
3/20/09
Indalex Holdings Finance Inc.
9/19/05
3/20/09
MMC Precision Holdings Corp.
Brazos Private Equity Partners LLC
3/23/06
3/22/09
Bi-Lo LLC
Lone Star Funds
12/23/04
3/23/09
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PE firm
Debtor
Buyout
ann. date
Bankruptcy
filing date
Rileys Ltd.
Greenhill Capital Partners, J.O. Hambro Capital Management Group Ltd.
7/30/07
3/25/09
F.T. Silfies Inc.
Quantum Equity Partners LLC
8/1/05
3/25/09
Kampa AG
Triton Beteiligungsberatung GmbH
11/2/06
3/25/09
Varig Logistica SA
MatlinPatterson LLC
1/11/06
3/31/09
USI Senior Holdings Inc. (United Subcontractors Inc.)
Wind Point Partners
9/30/04
3/31/09
Castle Holdco 4 Ltd. (Countrywide plc)
Apollo Management LP, Oaktree Capital Management LP
2/21/07
4/2/09
Zohar Waterworks LLC
Patriarch Partners LLC
8/30/05
4/2/09
BT Tires Group Holding LLC (Big 10 Tire Stores Inc.)
11/28/06
4/2/09
Signature Aluminum Inc.
H.I.G. Capital LLC
12/29/05
4/3/09
Jane & Co.
Stone Canyon Venture Partners LP, Walnut Private Equity Fund LP
2/27/04
4/6/09
Katz International Coasters GmbH
CBR Management GmbH; EquiVest I Fund
11/1/05
4/14/09
DWW Deutsche Woolworth GmbH & Co. OHG
Argyll Partners Ltd.
10/31/07
4/14/09
Odyssey Investment Partners LLC
1/19/00
4/19/09
Eurofresh Inc.
Bruckmann, Rosser, Sherrill & Co. LLC
12/31/01
4/21/09
Source Interlink Cos. (Primedia Enthusiast Media Inc.)
Yucaipa Cos. LLC
5/14/07
4/27/09
Victor Oolitic Stone Co.
Audax Group LP
8/25/05
4/28/09
Chrysler LLC
Cerberus Capital Management LP
5/14/07
4/30/09
Mark IV Industries Inc.
1/2/08
4/30/09
Accredited Home Lenders Holding Co.
Lone Star Funds
6/4/07
5/1/09
Thornburg Mortgage Inc.
MatlinPatterson LLC
3/27/08
5/1/09
AGT Crunch Acquisition LLC (Crunch Fitness International Inc.)
Angelo, Gordon & Co.
1/20/06
5/6/09
Riviera Group Pty Ltd.
GIC Special Investments Pte Ltd., Gresham Private Equity, Ironbridge Pty Ltd.
10/11/02
5/7/09
White Energy Inc.
Ares Management LLC
7/7/06
5/7/09
Gandi Innovations Ltd.
TA Associates Inc.
9/14/07
5/8/09
Roma Foods of Oklahoma Inc. (Eateries Inc.)
Hestia Holdings LLC
12/31/06
5/11/09
J.G. Wentworth LLC
JLL Partners Inc.
7/25/05
5/19/09
Anchor Blue Retail Group Inc.
6/1/03
5/27/09
Metaldyne Corp.
RHJ International SA
9/1/06
5/28/09
Consolidated Bedding Inc. (Spring Air)
American Capital Ltd., H.I.G. Capital LLC
7/17/07
5/29/09
HSF Holding Inc. (Hawaii Superferry Inc.)
J.F. Lehman & Co., Norwest Equity Partners
11/2/05
5/30/09
Richmont Capital Partners I LP
10/25/00
6/3/09
Berean Christian Stores LLC
JMH Capital
8/2/06
6/9/09
Citigroup Venture Capital Equity Partners LP, CVC Asia Pacific Ltd.,
Francisco Partners LP
1/13/04
6/12/09
MIG Inc. (Metromedia International Group Inc.)
CaucusCom Ventures LP, Compound Capital Ltd., Salford Capital Partners Inc.
8/22/07
6/18/09
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37 the daily deal Th u r s day De cember 17 2009
PE firm
Debtor
Buyout
ann. date
Bankruptcy
filing date
Bodilsen AS
EQT Opportunity Fund
11/2/06
6/23/09
CCS Medical Inc.
Warburg Pincus LLC
10/3/05
7/9/09
NV Broadcasting LLC
Arlington Capital Partners LP
9/19/02
7/13/09
RathGibson Inc.
DLJ Merchant Banking Partners LP
4/30/07
7/13/09
Lang Holdings Inc. (Lang Cos. LLC)
Catterton Partners
11/20/03
7/16/09
Wilton Holdings Inc.
GTCR Golder Rauner LLC
7/20/07
7/17/09
Ambassador Media Group LLC
Navigator Equity Partners LLC
8/30/02
7/24/09
Stant Corp.
H.I.G. Capital LLC
6/19/08
7/27/09
Arclin US Holdings Inc.; Arclin Canada Ltd. (Dynea North America)
Teachers’ Private Capital (Ontario Teachers’ Pension Plan)
11/21/06
7/27/09
Station Casinos Inc.
Colony Capital LLC
12/2/06
7/28/09
Eyedea SA
Green Recovery SAS
1/22/07
7/28/09
Mrs. John L. Strong & Co. LLC
Circle Peak Capital LLC
10/7/08
7/31/09
Cooper-Standard Automotive Holdings Inc.
Cypress Group LLC; Goldman Sachs Credit Partners LP
9/17/04
8/3/09
CommerceConnect Media Holdings Inc. (Cygnus Business Media Inc.)
Abry Partners LLC
5/23/00
8/3/09
SkyPower Corp.
Lehman Brothers Private Equity
6/11/07
8/13/09
Starfire Systems Inc.
Palladium Equity Partners LLC
7/11/07
8/13/09
Ellen Tracy Inc.
Radius Partners LLC, Windsong Brands LLC
4/10/08
8/14/09
GoldenTree Asset Management LP, GSO Capital Partners, J. Rothschild Group,
Magnetar Capital, Merrill Lynch Capital Corp., Ripplewood Holdings LLC
11/16/06
8/24/09
Bluewater Broadcasting Co. LLC
Alta Communications
4/30/03
8/24/09
Freedom Communications Holdings Inc.
Blackstone Group LP, Providence Equity Partners Inc.
5/19/04
9/1/09
Alternative Distribution Systems Inc.
Code Hennessy & Simmons LLC., William Blair Mezzanine Capital Fund II LP
9/9/99
9/2/09
Samsonite Company Stores LLC
CVC Capital Partners Ltd.
7/5/07
9/2/09
Velocity Express Corp.
TH Lee Putnam Ventures
5/31/00
9/24/09
Questex Media Group Inc.
Audax Group LP
5/23/05
10/5/09
Gilbert Global Equity Partners
2/2/04
10/8/09
Accuride Corp.
2/27/09
10/8/09
Ascend Media Holdings LLC
CCMP Capital Advisors LLC, Veronis Suhler Stevenson LLC
2002/2003
10/15/09
Stallion Oilfield Services Ltd.
Carlyle Group, Riverstone Holdings LLC
2/3/05
10/19/09
NTK Holdings Inc. (Nortek Inc.)
Thomas H. Lee Partners LP
7/15/04
10/21/09
Capmark Financial Group Inc.
Goldman Sachs Capital Partners LP, Kohlberg Kravis Roberts & Co.
8/3/05
10/25/09
Express Energy Services Operating LP
Macquarie Group Ltd., Wachovia Capital Partners
6/24/08
10/27/09
First Quench Retailing Ltd. (Thresher Group)
Vision Capital LLP
6/12/07
10/29/09
Panolam Holdings Co.
Genstar Capital LP, Sterling Group LP
8/25/05
11/4/09
Patrick Hackett Hardware Co.
Seaway Valley Capital Corp.
7/20/07
11/10/09
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Venturing into the abyss
More than three dozen venture capital-backed companies filed for bankruptcy, with most due to disappear altogether
C
redit starvation has affected all
industries in the past two years,
but venture capital-backed companies, with few tangible assets, were particularly ravaged in 2009, with most of the
bloodied opting to liquidate.
According to pipeline.thedeal.com,
some 40 VC-backed bankruptcies were
filed in 2009 through Nov. 15 (see table,
pages 40 to 41), and of the 35 in the U.S., 22
of them, or 63%, entered Chapter 7 liquidation. For all of 2008, there were only 17
VC-backed bankruptcies.
“Without the infusion of capital and
the assurance of future profitability, a liquidation, as opposed to a reorganization, is
more likely,” says Roger P. Glovsky of Lexington, Mass., law firm Indigo Venture
Law Offices, which provides counsel to
entrepreneurs and high-tech businesses.
Since VC-backed companies are “idea
companies,” they rely solely on the strength
of their innovations and tend to be more
vulnerable because they don’t have tangible assets, says Ron Silverman of New York
law firm Bingham McCutchen LLP.
“VC-backed companies are often startups in really early stages,” Silverman
explains. “When things work well, the
rewards are really terrific. If they don’t
work, there is much less in the way of assets or contracts or anything to reorganize
around. There’s nothing else to do but to
shut it down.”
Companies in the biotechnology/pharmaceuticals, medical devices and Internet
commerce sectors are most vulnerable to
economic downturns, Glovsky says.
The data proves Glovsky right. Of the
124 industries and subindustries tracked by
pipeline.thedeal.com, those three subsectors had the highest rates of bankruptcy.
“These are all technology-based industries with high-risk, long-term research
and development [needs but] no shortterm exit strategies,” Glovsky says. “These
high-risk deals are less attractive when
capital sources are limited and the exit op-
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portunities are pushed further out.”
He also feels that many VC-backed
companies had planned on obtaining later
rounds of financing that ultimately didn’t
materialize because of the economic slump.
“With the capital markets constricted, the
chance of a near-term public offering or
acquisition is much less,” Glovsky adds.
In the Internet commerce sector, three
companies (n2N Commerce Inc., Home
Decor Products Inc. and Elephant Pharmacy Inc.) sought Chapter 7 protection,
while one (Home Bistro Foods Inc.) filed
for Chapter 11 and another (Smartfundit.
com Ltd.) petitioned for administration in
the U.K.
Elephant Pharmacy, a Berkeley, Calif.,
health and wellness retailer, said it filed
for Chapter 7 on Feb. 10 because it couldn’t
raise the capital to continue operating. The
company had received $36 million in venture capital financing from Arthur Rubinfeld, Bay Area Equity Fund, CVS Corp.,
David Hadley and Tudor Investment
Corp. between 2004 and 2006. N2N Commerce, which received $30 million in VC
funding from General Catalyst Partners
and Limited Brands Inc. in 2007, was
forced into Chapter 11 on July 13 by creditors with roughly $6.8 million in claims.
Of the five VC-backed medical device
companies that failed this year, four sought
Chapter 7 (Therative Inc., Rubicor Medical Inc., Innovative Spinal Technologies
Inc. and OmniSonics Medical Technologies Inc.) while one filed for Chapter 11
(VivoMetrics Inc.). Innovative Spinal had
raised $57 million in VC funding from J.P.
Morgan Partners LLC, First Round Capital and Frontier Management Group
between 2005 and 2008, but its CFO, John
B. Henneman III, has said that his Boston
company filed for liquidation simply because it ran out of money. In September, it
sold itself to Integra LifeSciences Corp.
for $9.25 million.
The number of insolvencies hitting the
biotechnology/pharmaceuticals sector was
back
< Index >
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hardly surprising. A report issued in January by the Biotechnology Industry Organization indicated that only 10% of the 370
public U.S. biotech companies had positive
income and that 180 had less than a year of
cash remaining.
Six bankruptcies were filed in the subindustry, worst among all industry and
subindustry groups. Five companies filed
for Chapter 7 (Altus Pharmaceuticals
Inc., Argolyn Bioscience Inc., Dynogen
Pharmaceuticals Inc., Protein Sciences
Corp. and Cogentus Pharmaceuticals
Inc.), while one filed for administration in
the U.K. (York Pharma plc).
Plenty of other subsectors experienced
at least one VC-backed bankruptcy, among
them alternative energy (Greenline Industries Inc.), diversified manufacturing
(Luna Innovations Inc.), homebuilding
(Wall Homes Inc.), music (Muzak Holdings LLC), nanotechnology (NanoDynamics Inc.), semiconductors (Aviza Technology Inc.), telecommunications (ProtoStar
Ltd.), telecommunications equipment
(ThinkEngine Networks Inc.), information technology (Portaga Inc.), computer
hardware and software (Ortega InfoSystems Inc.), digital entertainment (Radioscape Ltd. and SeeqPod Inc.), leisure
(Travelworm Inc.), electronics (Ugobe
Inc. and DeepStreem Technologies Ltd.)
and new media (Joost UK Ltd., Espre Solutions Inc. and BroadRamp Inc.).
Some VC-backed companies took a
cheaper route to liquidation than Chapter 7. An assignment for the benefit of
creditors, or ABC, proceeding saves bankruptcy court costs since an assignee is appointed by a company to assume control
of its rights, titles and interests. Those assets are then liquidated and distributed to
creditors. A 60-day window is given for
the company to solicit the approval of the
assignee’s appointment from its creditors.
Among the VC-backed companies tak-
CONTINUED >
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39 the daily deal Thurs day De cember 17 2009
< PREVIOUS
ing the ABC route were New York-based
Mohen Inc., an ad-supported music and
video download service that shut down in
March and did business as SpiralFrog, and
Redwood City, Calif.-based NebuAd Inc.,
an online behavioral tracking startup.
Outside the U.S., only one insolvent VCbacked company, online video sharing services provider Joost, appears to have liquidated. Four others sought administration
in the U.K. with plans to sell themselves.
One, York Pharma, was sold in August.
There is more hope for after 2009, according to accounting firm Deloitte &
Touche LLP. In a report, Deloitte noted
that investors have been slowing down
their level of investments in VC funds and
shifting to later-stage and existing portfolio
companies, but the firm also revealed that
a majority of VC investors believe that it is
currently a better time to invest in promis-
ing entrepreneurial companies. Some 53%
of U.S. investors felt it was a “terrific” time;
61% of their U.K. counterparts felt the
same way.
“The current recession is not stopping
venture capitalists from looking for the
best investment opportunities in order to
produce the best possible returns for their
investors—regardless of borders,” the report asserted.
More encouraging is Deloitte’s finding
that 50% or more of the VC investors in Europe, the Americas, the U.K., Israel and the
Asia Pacific region plan on boosting their
investments over the next three years.
Even the level of VC-backed bankruptcies in the medical device and equipment
industries isn’t scaring those investors off.
In Deloitte’s study, 27% of the U.S. investors in the field would increase their funding over the next three years, while 62% of
those investors would hold their funding
at the same level in the same time period.
The situation in the semiconductor
industry is much less sanguine, however.
Deloitte reported that 56% of U.S. investors are expected to decrease their venture
funding within the next three years. The
maturity of the telecom sector has also led
36% of U.S. investors to decide to pull back
on future funding.
Indigo Venture’s Glovsky feels that, in
today’s tough economic times, VC funds
should look to invest in companies with
strong customer demand in a recessionary
environment and companies that can be financed through a single round of funding.
“If multiple rounds of financing are
needed, there is a risk that the capital markets will continue to be constrained and
second or third rounds of financing will
not be available,” he explains. “If success
depends on development of new technology, new markets or distribution channels,
or raising capital, those deals will be less
attractive to VCs.” n —Carolyn Okomo
deals don’t come easy in difficult markets.
finding them just got easier.
Source and track auctions, bankruptcies, financings, DIPs and M&A deals with the deal pipeline.
Using the Find A Deal search feature, you’re one click away from more than 60,000 deals
across 30 industries, updated daily by our global editorial staff.
The deal dashboard for your business is at http://pipeline.thedeal.com
To get a demonstration, contact Michael Crosby at 212-313-9325 or [email protected]
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Misadventure capital Venture capital-backed bankruptcies Jan. 1–Nov. 15, 2009
Debtor
Sector
Investor
Funding
date
Volume
($mill.)
Filing
date
Ortega InfoSystems Inc.
Computer hardware and software
Harbinger Venture Management, Sycamore Ventures Pte Ltd.
12/5/02
$11.8
1/12/09
ThinkEngine Networks Inc.
Telecom equipment
Prism Venture Partners, VantagePoint Venture Partners
2/13/01
15.0
1/14/09
Portaga Inc.
Leisure
Ascend Venture Group LLC, Cove Harbor Partners,
First Round Capital
8/15/06
5.8
1/16/09
Cogentus Pharmaceuticals Inc.
Biotechnology and pharmaceuticals
Apothecary Capital LLC, Keffi Group Ltd., Pinnacle Ventures,
Prospect Venture Partners,
Ridgeback Capital Management LLC
12/21/07
62.5
1/16/09
Wall Homes Inc.
Homebuilding
Jen Partners LLC, Warburg Pincus LLC
4/14/05
50.0
1/19/09
BroadRamp Inc.
New media
Venture Vest II
4/26/06
5.0
1/23/09
Espre Solutions Inc.
New media
StreamTraX Visual Communication Technologies Inc.
9/29/05
15.0
1/30/09
ManagedStorage International Inc.
Information technology services
Great Hill Partners LLC, J.P. Morgan Chase & Co.,
Tudor Ventures
1/16/03
22.0
2/4/09
Muzak Holdings LLC
Music
Bank America Capital Investors, New York Life Capital Partners,
Northwestern Mutual Financial Network
10/20/00
85.0
2/10/09
Elephant Pharmacy Inc.
Internet commerce
Arthur Rubinfeld, Bay Area Equity Fund, CVS Corp.,
David Hadley, Tudor Investment Corp.
11/16/04;
09/12/06
36.0
2/10/09
Recordant Inc.
Computer hardware and software
Kodiak Venture Partners
2/13/06
3.0
2/10/09
Dynogen Pharmaceuticals Inc.
A. M. Pappas & Associates LLC, HealthCare Ventures LLC,
Oxford Bioscience Partners, Abingworth Management Ltd.,
Atlas Venture, Medica Venture Partners,
Schroder Ventures Life Sciences, Wellcome Trust
4/20/04;
11/13/02
55.7
2/23/09
Home Bistro Foods Inc.
Internet commerce
CEI Ventures Inc., New York Community Investment Co. LLC,
Sustainable Jobs Fund LP
9/11/03
1.5
3/20/09
Mohen Inc. (SpiralFrog Inc.)
Digital Entertainment
Undisclosed investors
12/28/07;
04/19/06
10.9
3/20/09
OmniSonics Medical Technologies Inc.
Medical devices
Canaan Partners, Domain Associates LLC,
GE Asset Management Inc., Hambrecht & Quist Capital
Management LLC, New England Partners Capital LP,
Prism Venture Partners, Johnson & Johnson Development Corp.
10/9/03;
5/30/01;
7/18/00
52.7
3/23/09
Home Decor Products Inc.
Internet commerce
Kinderhook Partners LP, Seymour Holtzman,
3i Venture Capital, Comcast Interactive Capital,
Liberty Associated Partners LP
7/19/05;
12/20/06
72.1
3/27/09
SeeqPod Inc.
Digital entertainment
4/30/08
7.0
3/30/09
Ugobe Inc.
Electronics
Rose Tech Ventures LLC, First Round Capital,
Frontier Management Group, Band of Angels Fund,
Hiyield Venture Capital
5/31/06;
10/31/06;
6/10/08
23.3
4/17/09
Radioscape Ltd.
Digital entertainment
Atlas Venture, Royal Bank Ventures Ltd.,
Scottish Equity Partners Ltd., Texas Instruments Inc.,
Yasuda Enterprise Development Co. Ltd., iGlobe Partners Inc.
12/10/01;
04/11/02
25.2
4/30/09
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Misadventure capital Venture capital-backed bankruptcies Jan. 1–Nov. 15, 2009
Debtor
Sector
Investor
Funding
date
Volume
($mill.)
Filing
date
Innovative Spinal Technologies Inc.
Medical devices
J.P. Morgan Partners LLC, MPM Capital LP,
OrbiMed Advisors LLC
8/3/05;
09/30/08
57.0
5/15/09
NebuAd Inc.
New media
Menlo Ventures; Sierra Ventures
9/25/07
20.5
5/15/09
Hammerhead Systems Inc.
Networking hardware and software
Apex Venture Partners, Enterprise Partners Venture Capital,
FirstMark Capital, Foundation Capital, Mayfield,
Silver Creek Ventures
08/02/07;
01/31/06;
01/27/04
73.0
5/21/09
Nevis Networks Inc.
Networking hardware and software
Nokia Venture Partners
5/13/04
10.0
5/26/09
Smartfundit.com Ltd.
Internet commerce
BayTech Venture Capital Beratungs GmbH
12/4/08
4.1
5/26/09
Aviza Technology Inc.
Semiconductors
VantagePoint Venture Partners
10/17/03
50.0
6/9/09
DeepStream Technologies Ltd.
Electronics
Doughty Hanson Technology Ventures,
Welsh Assembly Government
9/27/04
17.9
6/12/09
Protein Sciences Corp.
Nosan Corp.
11/13/01;
01/08/02
3.0
6/22/09
Argolyn Bioscience Inc.
Intersouth Partners, Quaker BioVentures Inc.
6/27/07
15.8
7/6/09
Rubicor Medical Inc.
Medical devices
ITX International Equity Corp., Rubicor Inc. (management),
Safeguard Scientifics Inc.
8/28/06
30.0
7/10/09
n2N Commerce Inc.
Internet commerce
General Catalyst Partners, Limited Brands Inc.
2/5/07
30.0
7/13/09
Luna Innovations Inc.
(Luna Technologies Inc.)
Electronics
Columbia Capital, Envest Ventures I,
Novak Biddle Venture Partners, Soundview Technology,
Southwest One LLC, Virginia Tech
4/23/03
3.5
7/17/09
NanoDynamics Inc.
Nanotech
7/28/04
12.0
7/27/09
York Pharma plc
9/19/05
9.0
7/28/09
ProtoStar Ltd.
Telecommunications
New Enterprise Associates, SpaceVest Capital,
RedShift Ventures, VantagePoint Venture Partners
11/17/06;
09/13/06;
03/15/05
90.0
7/29/09
Greenline Industries Inc.
Alternative energy
Leaf Clean Energy Co.
4/8/08
20.0
8/7/09
Travelworm Inc.
Leisure
Cedar Street Group, Wasserstein Venture Capital
2/6/04
NA
8/13/09
Therative Inc.
Medical devices
Band of Angels Fund, Bessemer Venture Partners,
Foundation Capital, RWI Ventures
5/17/07
9.0
8/20/09
Joost UK Ltd. (Joost NV)
New media
Index Ventures, Li Ka Shing Foundation, Sequoia Capital,
Viacom Inc.
5/11/07
45.0
10/2/09
VivoMetrics Inc.
Medical devices
CSFB Private Equity, CyberFund LLC,
Hammer Capital Management Inc.
8/21/00
0.0
10/16/09
BankInvest Group, China Development Industrial Bank Inc.,
Clariden Bank, CMEA Ventures, Hotung Group,
Nomura International plc, Nomura Phase4 Ventures Ltd.,
Palladian Group, U.S. Venture Partners, Warburg Pincus LLC
05/26/04;
12/27/01
66.0
11/11/09
Altus Pharmaceuticals Inc.
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High and tight

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