An empirical examination of prepackaged bankruptcy

Financial Management (Financial Management Association), Spring, 1995 by Brian L. Betker

Two recent articles also investigate prepackaged bankruptcy. Tashjian, Lease, and McConnell (1994) examine the terms of prepackaged bankruptcy plans, including creditor writedowns and deviations from absolute priority, and conclude that on most dimensions prepacks provide benefits somewhere between what previous authors have reported for workouts and traditional bankruptcies. Chatterjee, Dhillon, and Ramirez (1994) compare firm characteristics and restructuring outcomes for a sample of exchange offers, prepacks, and traditional Chapter 11 filings. Analysis of security price reactions leads them to conclude that workouts preserve more value than prepacks, which in turn are less expensive than traditional Chapter 11 filings.

I. Data and Descriptive Statistics

Prepackaged bankruptcies are identified from The Bankruptcy Yearbook and Almanac (1993), The Bankruptcy DataSource, and from the Nexis database (search words include bankruptcy, prepackaged, prearranged, and prenegotiated). These sources yield 57 prepacks, and prospectuses and disclosure statements were obtained for 49 of these firms.(4) I define a prepackaged bankruptcy as one in which the firm files a bankruptcy petition and simultaneously files a plan of reorganization that had either been accepted or that major creditor groups have agreed in principle to support.(5)

Table 2 identifies the sample firms and provides information on their bankruptcy cases. Twenty of the 49 firms (41%) are LBOs, which is consistent with Hansen and Salerno's (1991) observation that prepacks are more likely to succeed when the number of creditor groups is small and these groups do not have widely divergent interests. Median prefiling total assets are $213 million. The sample firms are thus comparable in size to those in Gilson (1989) and Franks and Torous (1994). Six of the sample firms have assets of over $1 billion.

In eleven cases, firms solicited two votes prior to filing: one for an exchange offer and one for a prepack in case the exchange offer failed to draw an acceptable number of votes. Twenty-seven firms solicited votes only for a prepack. Eleven firms did not hold a prepetition vote but, instead, filed the bankruptcy petition and plan of reorganization with only an agreement in principle with major creditors (Tashjian et al. (1994) refer to these cases as "post-voted" prepacks). In some cases, the firm was forced to renegotiate some terms of the plan once in Chapter 11.

Of the eight firms that filed two bankruptcy plans, six did not conduct a prepetition vote. As for the other two firms, Southland was forced to resolicit votes because of alleged irregularities in the timing and method of the prepetition voting. Before the new vote, Southland renegotiated some terms of the plan with bondholders and preferred stockholders. Sunshine Precious Metals increased its distribution to bondholders after they threatened to challenge the results of the prepetition vote.

As expected, time in bankruptcy is substantially less in a prepack than in a traditional Chapter 11. Sample firms spent an average of 2.5 months from bankruptcy filing to plan confirmation (median 1.7 months). In contrast, Eberhart, Moore, and Roenfeldt (1990) report that an average firm spends around 25 months in a "traditional" Chapter 11 case.