Bankruptcy emergence in US doesn't ensure success

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The first few weeks of this year brought a surge of US companies dropping the shackles of bankruptcy to emerge with lighter debt loads, a fresh business plan and new owners.

The improving US economy, capital markets and a rise in prearranged bankruptcy plans have held the door open for companies to exit bankruptcy court, but turnaround experts warn that emergence is only the beginning.

"Emergence has nothing to do with turning the corner," said Alan Cohen, chairman of Abacus Advisors, a turnaround and restructuring firm. "You can correct a balance sheet by manipulating debt into equity, or reducing debt, but unless the entity focuses on improving operations, they're going to have a tough time."

RUSH TO EXIT
Some 11 formerly publicly traded companies have come out of bankruptcy so far this year, compared with just four in the same period last year, according to bankruptcy statistics provider BankruptcyData.com.

In 2008, only one company emerged in the first six months of the year.

Some firms, such as music and entertainment provider Muzak Holdings LLC, have been able to take advantage of more welcoming capital markets to fund their exit.

Others, such as RH Donnelley Corp, now known as Dex One Corp, have sped through the process after working out a restructuring deal with lenders before the bankruptcy filing.

"The prepacks are pushing people out much more quickly," said Ed Albert, a managing director at investment firm Macquarie Capital (USA) Inc. He added that the sheer volume of companies that filed for Chapter 11 bankruptcy over the past few years contributed to the new year's rush.

Some 210 public companies filed for bankruptcy last year, up 52 percent from the year before and the largest number since the previous US downturn in 2001, according to BankruptcyData.com

"The timing of the filings, the velocity of the bankruptcy process and more prepackaged solutions have resulted in a wave of emergence," said Albert.

_PAEGBERAK_
TROUBLE AHEAD?
An improving economy has helped loosen capital markets, allowing companies to refinance debt or reach deals with new lenders. Indeed, the economy grew at a faster-than-expected 5.7 percent annual pace in the last quarter of 2009.

"You can't save companies in a bad economy," said Richard Mikels, a partner with law firm Mintz Levin. "But when the economy starts to get a little better, you have a real chance of saving these companies."

But Mikels warned that an improving economy would bring more new bankruptcies, not less. That's because more creditors will foreclose on the assets of troubled companies now because those assets have slightly more value than the year before. In addition, credit markets are offering more loans to companies seeking Chapter 11 protection, he said.

And companies still need to fix the problems that sent them to bankruptcy court in the first place.

"Investors should "look at how long it took companies to emerge - did they do a balance sheet restructuring only, or a balance sheet restructuring as well as an operational restructure? Did they correct their operations?" said Cohen.

"When you have an ache, you take a Tylenol, you feel better for a while but you didn't determine what caused the ache," he said. "It's just a Band-Aid."

Once-public companies to emerge so far this year, according to BankruptcyData.com, include Muzak, R.H. Donnelley (Dex One), Teton Energy Corp, Vermillion Inc, Simmons Bedding Co, Merisant Worldwide Inc, CanArgo Energy Corp, Fairchild Corp, Lenox Group, Edge Petroleum Corp and Building Materials Holding Corp.