A CEO copes with Chapter 11 - Bankcruptcy

Chief Executive, The, June, 1992 by Wayne E. Waldera

What strikes fear into even the flintiest chief executive? Two possibilities: Having the board of directors withdraw its support and filing for Chapter 11. But horrors aside, running the bankruptcy gauntlet can actually be instructive.

Much has been written about the alarming uptrend in corporate bankruptcies. But what statistics don't show is the change in the content and process of Chapter 11 proceedings as companies seek court protection and time to reorganize.

Bankruptcy proceedings in the 1990s are a far cry from those in the 1980s. In 1982, when Wickes gained entry to the history books as the largest corporation to file for Chapter 11, I was president of Gambles, a major hardware franchiser and a Wickes subsidiary. At that time, the revised bankruptcy code was only four years old, and few companies knew or utilized the Chapter 11 mechanism as a means to restructure debt. For most creditors, lenders and managers, the process was a maiden voyage. It was difficult, but manageable.

A mere decade later, the expertise of Chapter 11 parties has increased commensurate with the number of filings. From the opening gavel, both secured and unsecured creditors are working to consolidate as much courtroom muscle as possible. Legal and financial professionals now view bankruptcies as their primary business, second only to M&A litigation.

Illustrative of the changes in Chapter 11 litigation is the recent experience of Amdura Corp. The company's Coast America (including Coast to Coast Stores) and FOK/Trustworthy franchise and dealer stores are well-known in the retailing industry. What caused Amdura to file for Chapter 11 - and the elements that both contributed to and hampered the subsequent reorganization of the company - give a good indication of what other companies might find in a 1990s style reorganization.

A BRAVE NEW WORLD

Amdura had been an old-line machinery and specialty manufacturing organization that decided to focus on one area. In the late 1980s, the company elected to expand its distribution business and made several large acquisitions, including the Denver-based Coast to Coast Stores business and Globe Distribution, an automotive after-market distribution business in the Northeast.

Acquisitions required substantial financing. But that was readily available in the leveraged buyout approach made popular in the fast-and-loose 1980s. In Amdura's case, while the existing bank group displayed confidence in management, a major investor group was not convinced. A proxy fight was waged, and a new board of directors was brought in. It was late 1989, and the $800 million company now had no chief executive officer, no plans and massive loans falling due. The board asked me to take the reins of the company, and I became Amdura's CEO in November 1989.

The company was deteriorating fast. Cash flows were tight, and banks had demanded - and achieved - a more secured position. Vendors had tightened credit lines or refused to ship goods, and store owners and managers fought to make sales under adverse conditions. The obstacles were not insurmountable, but any comeback effort would require sacrifices by employees and a cooperative effort by store owners, bankers and vendors. We came close, but ran out of time. The only solution was Chapter 11, so we filed for protection in April 1990.

Amdura's was one of the first Chapter 11 filings of the new decade, but other companies also have tested the choppy waters of the rapidly changing bankruptcy arena.

Some of the problems Amdura confronted may be pertinent to others who face a similar ordeal.

CONFLICTING DEMANDS

In any bankruptcy, it is a CEO'S responsibility to anticipate conflicting demands and interests, thereby providing creditors with the highest possible return. A chief executive must also manage the company's resources and maintain corporate organization by providing services to the customer base. In the process, a business continues to function and return value to equity holders.

Once the frustrations of employees and store owners were addressed, many of the internal, organizational problems proved surmountable. Keeping the organization together required regular dialogue with division managers and store owner/ dealers. Active communication was a vital element in managing expectations to keep awareness up and fears down. By building on previously strong allegiances and addressing problems head-on, we were able to maintain dealer volume while selling our businesses.

Exceptionally tasking, however, was the process of meeting the demands of external parties - the court, the 14-member bank group, three creditors committees, retiree committees, and their financial advisers and legal representatives. The level of objections raised by the parties was staggering.

Attorneys representing major creditors were well-armed. First-day or emergency orders, which judges once approved without question, required lengthy testimony and resubmission. Each party took a stand and entrenched itself firmly. The level of hostility was high and unyielding. Meanwhile, of course, compromise is essential in any reorganization process. As chief executive, I discovered quickly that a vast part of every day would be spent trying to forge many different agreements between committees, banks and their professional representatives, while our attorneys fought for time from the court. Such struggles marked the 18-month Chapter 11 period, and they continued through the confirmation hearings and up to the effective date.