The U.S. economy is experiencing an uninterrupted period of growth not seen since the end of World War II. Unemployment is at historical lows. Golf is surging in popularity.
Yet, on May 4, Melville, N.Y.- based Family Golf Centers and 132 affiliates filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. The petitions listed assets of $491 million and debts of $338.8 million, including $115 million in debt securities.
Family Golf Centers is not alone. Bankruptcy filings by significant public companies have continued at a high rate despite unprecedented prosperity. Area companies commencing bankruptcy cases in 1999 or 2000 include Hechinger, Iridium, Gemicom and Integrated Health.
Every company that enters Chapter11 has a unique story, but certain common themes explain why a good economy does not provide immunity from the need to reorganize.
In the best of economies, a business must have a sound concept and effective operations. Iridium developed a product that not enough people wanted. Hechinger, which pioneered a new market category, fell prey to a generation of competitors that raised the category to a new level.
Jitney Jungle and Eagle Foods, two regional supermarket chains of significant size, filed Chapter 11 petitions in late 1999 and 2000, respectively. They are only the latest victims of competition in an intensely competitive, low-margin industry. The same may be said of Tower Air, which, by seeking bankruptcy protection in February, followed the footsteps of Continental, TWA, Braniff, Pan Am and Eastern.
A healthy economy actually causes competition to intensify, as more players are able to attract the funds necessary to enter thriving markets.
The interrelatedness of the world economy causes bankruptcies in many ways, some predictable and some not so predictable. There are four domestic steel companies now in Chapter 11: Geneva Steel, Acme Steel, Gulf States Steel and Leclede Steel. In the summer of 1998, the only market with a strong demand for steel was the United States. This led to an unprecedented surge in imports, a glut of supply and a catastropic decline in prices. U.S. steel companies, in short, are the victims of the strong domestic economy.
The economic turmoil of 1998 also caused Russia to default on its debt, in turn causing the failure or near failure of several hedge funds, the most notable of which was Long Drive Capital. The hedge fund shock waves caused U.S. financial markets to demand higher spreads over U.S. Treasuries for private debt, including mortgage-backed securities. Several companies in the business of originating and securitizing mortgages found themselves unable to survive in this interest environment. Included was local mortgage powerhouse Criimi Mae.
Medicare regulations were, for many years, the foundation of a profitable nursing home industry. A change in those regulations in 1999 has caused a rash of nursing home operators to fail. In addition to Integrated Health, the list of filers in 1999 and 2000 includes Vencor, Sun Healthcare Group and Grand Court Lifestyles.
An unexpected, but surprisingly effective, use of Chapter 11 has been to address mass tort exposure. Dow-Corning most recently took this route to resolve liability issues related to silicone breast implants.
Chapter 11 is not a death sentence. In most cases involving public companies, bankruptcy provides an opportunity for rebirth. For a struggling company, the key is to act before it is too late.
Many a company has lost its chance for survival or crippled its long-term prospects by trying to appease creditors as long as possible. Timely action can produce either a successful Chapter 11 reorganization or an out of court restructuring.
From a creditor's perspective, the keys are vigilance and well-informed patience. There is no substitute for a credit function that spots problems early and curbs exposure before a bankruptcy occurs. Once you have become a creditor in a bankruptcy, decisions are harder. Precipitous action could derail a prospective reorganization that would yield more value to creditors than liquidation. Yet, delay may permit a debtor with no real hope of survival to fritter away valuable assets on losing operations.
Mark Ellenberg is a partner in the law firm of Cadwalader, Wickersham & Taft.
The Melville, N.Y.-based operator of 100 golf facilities and 17 ice skating facilities throughout North America sought the protection of the bankruptcy court after failing to make an interest payment due May 1.
In the summer of 1998, the economies of Asia and South America were in turmoil.
Chapter 11 has also been used for claims related to asbestos exposure -- Johns-Manville and others -- and to an intrauterine birth control device (A.H. Robins). There has been much recent discussion about one or more tobacco companies considering Chapter 11, as well.
- Copyright 2000 American City Business Journals Inc.
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