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Some deals work - while others require an orderly cleanup. Tiger liquidates $2 billion
of distressed consumer goods and industrial M&E annually. Call 888-55-TIGER.
Because some deals aren’t worth following e m d re t fo i
recovery for creditors? Whereas
most middle market bankruptcies
today result in Section 363 sales
and/or liquidations, it is not
uncommon for nonprofit entities
to have unencumbered collateral
available to them both to help fund a
restructuring and to provide liquidity
for post-restructuring operations.
The distressed entity also needs
to assess where it has leverage in
negotiations with the indenture
trustee, such as with lien perfection
issues. Most critical is to be proactive
in assessing the time horizon. To
the extent the distressed entity has
control of cash, it is imperative to
ensure that it has sufficient funds to
implement improvement initiatives
and effectuate a restructuring, as
bondholders rarely have the capacity
to provide funds to recapitalize the
business. The fact that the tax-free
bondholders are frequently willing
to reissue bonds with 30-plus year
amortizations enhances the likelihood
of finding feasible solutions.
What is critical in tax-free middle
market restructurings is for the
stakeholders to be solution-oriented and to build trust and
transparency between them and the
professionals early in the process.
Since there are frequently more
stakeholders than in a traditional
middle market restructuring (with
a vocal senior lender), it is not
uncommon for tax-free middle
market restructurings to move at a
snail’s pace, comparatively, which can
increase risk and professional cost.
Some of the best outcomes result
from collaboration among the
distressed entity, its professionals,
and bondholder professionals.
Three recent examples of
creative outcomes are:
KidsPeace (13-14508 et al). KidsPeace
is a nonprofit organization that
owns and operates an adolescent
psychiatric hospital in Pennsylvania
and has behavioral health operations
in a number of other states. It had
more than $60 million of bond debt
outstanding in 2012. As a result of
changes in reimbursement, some
quality assurance issues, and a
reduction in patient census, the entity
was no longer able to meet its bond
obligations, which were secured
by all the enterprise’s revenues.
KidsPeace proactively hired a
financial advisor for guidance on
strategic alternatives and to present a
liquidity and stabilization plan to the
indenture trustee and its advisors.
Three bondholders held more than
80 percent of the bonds. Other
stakeholder constituents included the
Pension Benefit Guaranty Corporation
(PBGC) and trade creditors.
KidsPeace and its advisors had
numerous meetings with the
indenture trustee and its advisors. The
initial steps involved determining,
based on the changing patient
landscape, reimbursement rates, and
other factors, what modifications
to the business model were needed
to ensure long-term viability and
what the resulting sustainable cash
flow was likely to be. The indenture
trustee and its advisors and the
bondholders needed to evaluate
whether the resulting cash flow
model was acceptable in view of the
likely sale value of the operations.
During the prebankruptcy negotiation
stage the company was able to
successfully terminate the pension.
Ultimately, the indenture trustee and
bondholders agreed on a restructuring
of the bonds into two different series
of bonds. The bondholder treatment
was memorialized in a plan support
agreement. KidsPeace entered
bankruptcy without agreement from
the PBGC or the trade creditors, but
with the bondholders’ agreement,
the major creditor was behind
the plan of reorganization.
The bankruptcy ultimately took more
than a year, but most of the hard
work had been done prepetition.
Eventually, the PBGC and the
creditors’ committee agreed to
consensual treatment. The plan vote
by all impaired classes entitled to
vote was overwhelmingly in favor.
KidsPeace emerged from bankruptcy
in 2014 and is still successfully
serving its mission today.
Chicagoland Jewish High School
(11-19342). Chicagoland Jewish High
School was the first and only high
school exclusively serving the Jewish
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