Mergers and acquistions specialists move to bankruptcy court

With credit markets frozen, what do merger and acquisitions specialists do? Well, they hang out in bankruptcy court looking for deals.

Debt is turning into the new equity, according to a story in today's Wall Street Journal. Companies are moving in and out of bankruptcy court quickly by offering their debt holders equity in the company, or by finding investors who will put up enough cash to buy assets at liquidation prices. The new company then emerges debt free.
"Debt is the new equity. There are tremendous opportunities for investors to really take control of, or purchase, companies at a very good price," Johnathan Henes, a bankruptcy partner at law firm Kirkland & Ellis, told the Journal. He handled Masonite's restructuring.

These new restructurings are not much different than the recent, more public deals made with creditors of GM and Chrysler, but creditors do usually ended up with a larger stake in the company. For example, in the Masonite case, stakeholders had a reorganization plan in place even before the company filed for Chapter 11 bankruptcy. Its 161 senior secured lenders swapped more than $1.4 billion in debt for a collective 97.5 percent stake in the company. No firm has more than a 20 percent stake in the new Masonite.

The number of prearranged bankruptcy plans that have the blessing of the majority of the creditors before filing is expected to double in 2009, according to New Generation Research, a bankruptcy data firm. The number of asset sales arranged out of bankruptcy court are well ahead of last year's pace.

The biggest losers, which usually is true with a bankruptcy, are the stockholders. With the creditors grabbing nearly 100 percent of the newly emerged company, stockholders are usually left with shares worth almost nothing.

The good news for the companies is that they leave bankruptcy court with almost no debt, so the new owners (or former creditors) now have a better chance of getting back their original investment. They start as creditors and end up as owners.

In other situations, where creditor restructuring has not worked out in advance, 363 bankruptcy sales, which are a type of auction, cleanse the companies of debts. These auction sales attract new owners because they can buy the assets at bargain basement prices. These sales can substitute as a reorganization plan and leave the creditors with much less than they may have gotten if they accepted a stake in the company.

One recent auction shows how cheaply investors can buy assets and leave creditors behind. Syms Corp. and Vornado Realty won the auction bid on Filene's Basement's assets for just $63 million, which included the company's inventory, stores and trademarks.

Mergers and acquisition specialists, who now have a bankruptcy practice as well, can still make lots of money putting together deals. It's just that instead of mergers or acquisitions they're finding buyers for bankruptcy assets or helping to restructure debt into equity.

Lita Epstein has written more than 25 books including Trading for Dummies and Reading Financial Reports for Dummies.

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