Struggling companies like Incora and Envision Healthcare Corp. asked lenders for lifelines, and got them, in contentious transactions that sometimes triggered lawsuits. Then they went bust anyway.
The bankruptcy filings, which came as recently as last week, underscore how floundering companies that seek more money from investors are often only delaying the inevitable. And when they do fail, their final financings might leave everyone worse off.
A study by Fitch of 30 transactions from ailing companies seeking to borrow more, delay maturities, or otherwise manage liabilities found that 24 of these deals either amounted to defaults, or were followed by a bankruptcy or default down the line. Instead of cutting back debt as a true restructuring would, these deals often just move it around.
The corporations’ debt loads typically ended up bigger and more complicated, making it harder for creditors to untangle liabilities and figure out who will get repaid how much. Companies can also take longer to exit bankruptcy and return operations to normal.
“The problem is a number of these deals don’t address the capital structure,” said Jayme Goldstein, co-chair of the financial restructuring group at law firm Paul Hastings. “The balance sheet stays the same. It’s still as levered as it was, maybe even more levered.”
Ruling in Houston
Although companies have for years sought to borrow more and otherwise tweak their liabilities when they were in decline, many of the latest iterations of these efforts have resulted in intense legal brawls. Some corporations allowed a handful of lenders that gave them additional money to jump to the front of the priority line for debt, giving those money managers a first claim on the failed company’s assets.
That’s what happened with Incora, an airplane and aerospace parts supplier backed by private equity firm Platinum Equity that filed for bankrutpcy last week. The company, legally known as Wesco Aircraft Holdings Inc., got financing last year that effectively gave some lenders the first priority for repayment, known as uptiering. Money managers that weren’t given the right to participate in the deal sued, asking the court to void the transaction.
Serta Simmons Bedding, a mattress maker that helped pioneer uptiering, faced litigation from Apollo Global Management Inc. and other investors left in the cold after the company’s controversial financing transaction. The investors lost the suit. Even after the company filed to reorganize under Chapter 11 in January, a Houston bankruptcy court ruled that the earlier financing could stand.
That was a clear sign to other distressed companies that had completed similarly disputed transactions: the southern district of Texas might be the best venue to deal with the lawsuits that had piled up in the deals’ wakes. Even without such litigation, companies have sought out the court as the go-to venue for dealing with complicated capital structures after debt swaps and other liability management transactions.
A spate of companies followed Serta’s lead. Incora, Diebold Nixdorf Inc. and KKR Co.’s Envision also all filed for bankruptcy in Houston.
Representatives for Envision and Diebold declined to comment. Spokespeople for Incora and Serta didn’t respond to requests for comment.
Breathing Room
Faltering companies will sometimes borrow against a successful business, stripping the unit away from existing creditors. J. Crew Group Inc. pioneered this technique, sometimes known as a “drop down.”
There are success stories. Surfware retailer Boardriders, for instance, staved off bankruptcy after a contentious financing deal. In March, Authentic Brands Group agreed to acquire the company, according to a statement. Restaurant supplier TriMark has also stayed afloat since it settled a dispute over a similar deal last year.
When companies don’t get enough breathing room from restructurings, they usually go bankrupt, said Laura R. Hall, a partner who specializes in restructuring for the law firm Allen & Overy. Hall keeps tabs on some of the companies that have completed these contentious debt deals in recent years. Of the fourteen she tracks, half have filed for bankruptcy so far.
“I think these debt deals can work, but it’s a very challenging balance,” Hall said. “You need to get enough debt relief head-room, whether it’s time-based or dollars-based.”
1,600 Pages
When companies do end up filing for bankruptcy after engineering these liability management transactions, reorganizing can be more complex than if the company had just filed sooner.
Diebold Nixdorf, which makes ATMs, engineered a complicated debt exchange last year to stave off Chapter 11. Unlike other companies, its liability management didn’t set off a wave of lawsuits.
However, it did create an exceptionally complicated capital structure. The company filed for bankruptcy last week. Its disclosure statement, a routine filing, is over 1,600 pages, where it’s often closer to a few hundred pages for comparable companies.
Serta, meanwhile, has had hours of hearings in bankruptcy court pertaining to its financing in 2020. Partners for the company’s law firm charge as much as $2,095 an hour to work with the company, according to court papers.
While Chapter 11 for these companies may be delayed by an injection of new money, there can be a higher cost for these financings ultimately, said Lisa Schweitzer, a partner with Cleary Gottlieb. When these firms do file for bankruptcy, the Chapter 11 process is often interlaced with lender fights and, as a result, adversary proceedings, she said.
“It becomes a harder bankruptcy,” Schweitzer said.
