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Business Finance, Bankruptcy & Restructuring

Business/Financial Reorganizations

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Godfrey & Kahn's Business Finance, Bankruptcy & Restructuring Practice Group employs a wide range of business law "treatments" for clients in financial distress.

Successful business reorganization depends on early discovery of problems, and then on the selection of the right legal strategy. Following are examples of strategies we employ:

Refinancing the "Fatigued" Lender

A company is often pushed into bankruptcy by a senior financial lender who has become disenchanted with the company as a borrower. The result of this loss of confidence is pressure to renegotiate the terms of the lending arrangement. The lender will demand an increased interest rate (to compensate for the increased risk) and an increased ratio of collateral to debt. Company management may agree to such demands in order to buy time, often without consulting legal counsel first. The result is reduced cash availability at the worst possible time, which often hastens the decline and may lead to a situation where potential recovery is unlikely.

Accommodating "lender fatigue" or "lender disenchantment" is rarely a good strategy. Access to working capital will decline as the lender attempts to extricate itself from the relationship. The lender's cure will only make matters worse.

Usually, refinancing the senior debt is better for both the company and the lender. The company retains its working capital and benefits from a new lender who believes the company has a future. Refinancing benefits the "fatigued" lender because its "risky" loan is paid off altogether. Therefore, a financial "transplant" is the treatment of choice, if a new lender can be found.

Godfrey & Kahn's Business Finance, Bankruptcy & Restructuring Practice Group is frequently called upon to facilitate the refinancing of a troubled business. We are familiar with potential financing sources and can rapidly assess the company's needs to evaluate which lenders should be approached—bank, finance company or asset-based lender. This can save time and money, both precious commodities during a turnaround.

Following the initial stages, we help present the company to the prospective lender to maximize the likelihood of a favorable result. Sometimes old lenders become disenchanted with the company because of a perceived weakness in management. We can help management refocus and address the problems that contributed to financial distress in the first place. This will foster the new lender's confidence that the company will be a good customer.

Out-of-Court Restructuring

Sometimes the problem is not only with the senior lender, but also with the company's trade vendors. Unpaid vendors can be held off only temporarily. Soon, management's time is consumed by working individual deals with the trade creditors and staving off lawsuits. One response is a Chapter 11 filing though recently, informal restructurings have been much more successful than the more formal Chapter 11 proceeding. Many credit managers who, in the past, might have forced a delinquent customer into bankruptcy have found that working with a troubled company can pay off. Chapter 11 reorganization, while still appropriate in some circumstances, often involves cumbersome procedures, time and expenses. An out-of-court restructuring is generally cheaper and more flexible, does not pose as many risks—such as loss of company control—and does not damage the franchise value of the company as seriously.

In our out-of-court restructurings, an informal creditors' committee is formed which selects counsel. The company meets with the committee, discloses appropriate financial information, and negotiates a repayment plan based on that information. The key to this process is creditor cooperation resulting from confidence that the restructuring is being handled in a straightforward, professional manner.

Godfrey & Kahn has had great success with informal restructurings. We can assist in formulating the repayment plan, coordinating it with the refinancing of senior debt, and preparing financial projections and analyses, which is the basis for the plan's credibility. High emotions can be diffused when an informal workout is managed with competence, credibility and professionalism.

Preplanned Chapter 11

Sometimes out-of-court restructuring is not possible and preplanned Chapter 11 is the ideal solution. In these cases, either creditor cooperation breaks down or the significant debt restructuring tools provided by federal bankruptcy law are needed to enable a company to implement its repayment plan.

While a full-scale Chapter 11 case can last a year or more, the company may be in and out of bankruptcy court within a few months when opting for a preplanned solution, as much of the work is done prior to the filing. Typically, the company first finds a senior lender and negotiates future financing. As in an out-of-court restructuring, the company will negotiate a repayment plan with an informal creditors' committee. In some cases, the creditors will be asked to vote on the repayment plan prior to the bankruptcy filing. In other instances, the plan and disclosure statement describing it may be filed in court at the beginning of the formal bankruptcy case. Creditors are given an early opportunity to vote for or against the plan following court review and approval of the disclosure statement. While this process is under way, the company may use federal bankruptcy law powers to resolve disputed debts, sell unneeded assets, reject burdensome contracts, or reverse certain payments or property seizures. If all goes well, the company may be able to emerge from bankruptcy court in a matter of months, in no small part due to experienced and efficient restructuring counsel.

These are just a few examples of treatment options for a financially troubled business. However, the Godfrey & Kahn's Business Finance, Bankruptcy & Restructuring Practice Group helps companies make an early diagnosis and provides the assistance of competent turnaround professionals to maximize the opportunity for financial recovery.

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