NEW YORK, March 6 (Reuters) - Bankruptcy can be just
about as traumatic as it gets for a company, its employees,
customers, and suppliers. The only thing worse - going through
it again, and again.
The number of companies making second trips through
bankruptcy -- sometimes dubbed "Chapter 22" filings, or Chapter
11 times two -- has jumped in the first two months of 2012.
Four of the 17 public companies that have filed for
bankruptcy this year, including Twinkie maker Hostess Brands and
family-style restaurateur Buffets, are repeat filers, according
to BankruptcyData.com, which tracks filings by publicly traded
companies and repeat filings for companies that were once listed
on a stock exchange. That compares with six companies that slid
back into bankruptcy in all of 2011.
It's not unheard of for a company to file a "Chapter 33."
Late last year, clothing retailer Filene's Basement filed its
third Chapter 11 in 12 years. It has now gone out of business.
Companies often go through bankruptcy as the system seems to
encourage - getting out of Chapter 11 with streamlined
operations and in better shape to weather economic changes.
When that does not happen, it is often because a company
still has too much debt. Lenders are a big factor because they
provide the financing, but the blame can also lie with the
companies, investors, bankers, lawyers and judges.
"There is too much emphasis on getting out, and getting on
with business rather than whether it is going to work," said Ed
Altman, the Max L. Heine Professor of Finance at the Stern
School of Business at New York University.
Some companies never make it out of bankruptcy, and -- like
Filene's -- end up liquidating. But for those that do emerge,
and then tumble into bankruptcy again, it's a failure of
everyone involved, Altman says.
He said he expects more such filings as companies that have
used bankruptcy only to cut debt face up to operational problems
they have not solved. The cost of repeat bankruptcy includes a
new round of legal fees and damaged corporate reputations.
Under the law, judges must ensure a company's reorganization
plan is feasible before allowing it to exit bankruptcy. Still,
companies do not always emerge in sound enough financial shape
to weather an uncertain economy.
Typically, experts say, Chapter 22s increase as overall
bankruptcy filings rise. However, the quick takeoff of repeat
filings this year comes as the number of bankruptcies continues
at the same pace as last year. The 17 total public-company
filings so far in 2012 compares with 15 at this point last year.
To date this year, the number of Chapter 22 bankruptcies
filed as a percentage of overall bankruptcies is running at a
rate that could outpace prior year Chapter 22 filings.
The companies that have filed this year have little in
common on the face of it.
Hostess Brands, Buffets Restaurants and ocean shipper TBS
International filed for Chapter 11 again. Fountain Powerboats
Industries - maker of the Donzi speedboat and Pro-Line and Baja
fishing boats - also went back to court again.
Spokesmen for Hostess and Buffets declined to comment.
Spokesmen for TBS and Fountain Powerboats did not return calls
PAYING AGAIN AND AGAIN
Each time a company goes bankrupt, it must pay for lawyers
and advisers not only for itself, but for its major creditors.
In its first bankruptcy, Hostess spent more than $170 million on
professional fees, based on its monthly operating reports.
Bankruptcy the second or third time around often involves a
new cast of characters. In bankruptcy, company ownership often
shifts from shareholders to secured creditors, who hire a new
board and may name new managers. They in turn hire their
favorite lawyers and advisers, and decide which court to use.
For Buffets, a 30-year old restaurant group that runs the
Old Country Buffet and Hometown Buffet chains, its second
bankruptcy is a return trip to the same judge in Delaware it got
to know the first time around.
Buffets first filed for bankruptcy in January 2008, blaming
weak consumer spending, foreclosures, and high food and energy
costs for cutting its cash. It sold restaurants and cut its debt
by more than half to about $250 million.
The company emerged from bankruptcy in April 2009 despite
lingering problems as bank lenders demanded expensive new debt
and restaurant leases were difficult to negotiate. That
collided, post bankruptcy, with weak consumer demand and higher
food prices, according to Saul Burian, a managing director at
Houlihan Lokey who advised Buffets on its first bankruptcy.
Only a year after exiting bankruptcy, Buffets hired a
different adviser and was considering a sale. But no buyer was
announced and Buffets filed for bankruptcy again in January.
This time, the company plans to tackle the leases, according to
the restaurant group's reorganization plan filed in court.
Hostess faced some similar problems. The company filed for
its first bankruptcy in 2004, citing declining sales, high food
costs, excess capacity and worker benefit expenses. It tackled
some issues - closing bakeries and simplifying some union
contracts -- but it did not deal with its debt. It went into the
first bankruptcy with $648.5 million in debt, and came out with
more than $800 million, according to court documents.
As a result, the company's second bankruptcy-- after less
than three years under the control of private equity firm
Ripplewood Holdings -- came as no surprise to some workers.
One union, the Bakery, Confectionary, Tobacco Workers and
Grain Millers International Union, accused the company of having
"frittered away" union concessions, wasting money on a corporate
headquarters move, according to court papers. Hostess Chief
Executive Brian Driscoll, though, has blamed legacy worker
costs, uncompetitive collective bargaining agreements and debt.
The company's new plan is to eliminate these "crippling"
payments and distribution costs it did not tackle the first
time, Driscoll wrote in papers filed in U.S. Bankruptcy Court in
Manhattan. The previous bankruptcy was in Missouri.
Heavy debt loads are a common problem for companies whose
bankruptcies fail, Altman said. Companies often use debt from
their secured creditors to keep going after bankruptcy, and the
higher the fees on that debt, the more the creditors earn.
High debt loads mean a better chance of defaulting again,
Altman said, while companies with less debt and more equity do
better after bankruptcy.
"The culprit is the players in the system who have maybe a
too short-term horizon," he said.
(Reporting By Caroline Humer)
Follow us on Twitter: @ReutersLegal