Summary
I am an engineer and I am a restructuring expert. My firm focuses on operational matters, and I am the first to say that you should always make voluntary restructuring changes before you file for Chapter 11. I hate seeing companies file as much as anyone else. However, there are times when you have to do what you have to do.
Analysis
There are no doubts that there are benefits to Chapter 11. Creditors who properly manage the threat of Chapter 11 can wrest control of a company from incompetent management and still work with equity holders. Then there are the management teams who live in a world of reality and file voluntarily, thereby establishing a working relationship with the secured creditors.
Sadly what often happens is the creditors have to wait for the company to fall flat on its face before they can we told you so and then seize the company through court. Contrary to popular belief, no bank or creditor wants to take a company into bankruptcy. Bankruptcy brings certain advantages to the senior secured creditors but these advantages are essential to putting the company back on its feet or to make the senior secured creditors partially whole. Another upside is: House cleaning. You can clear out the knuckleheads who drove the company into bankruptcy and put the right people in charge. The downsides of bankruptcy are many; ranging from damaged reputations to short changing/cheating suppliers and wiping out equity holders.
I will be the first to say that there have been times when the incompetence of management has left me thinking bankruptcy would put the company out if its misery and spare the customers, creditors from more pain and misery. The great thing about the free market is that the customers are indicators. Customers will not do business with junk companies. In the case of telephone companies, customers file complaints with the public service commissions (public utility commissions in some states).
The more and more I think about it, the more I am convinced that Fairpoint needs to file. Every horror story you hear just scares the heck out of me. Frankly, I am questioning management’s ability to see the company through this rough time. Who in the world ignores an auditor’s report?
P.J. Louis consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
