Ever-shorter U.S. bankruptcies have creditors scrambling

Wed Feb 1, 2017 4:28pm EST
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By Tom Hals

WILMINGTON, Del. (Reuters) - Financially distressed companies that file for U.S. bankruptcy are emerging from court proceedings more quickly than ever, lowering legal costs but also forcing junior creditors to scramble to protect their interests.

In 2016, the average Chapter 11 case took 7.3 months, the quickest ever and less than half the average in 2013, according to data compiled for Reuters from Bankruptcydata.com, which monitors public company filings dating back to 1990. Since then, the median case length was 16.1 months.

Legal strategies, such as prepackaged bankruptcies and quick auctions, and the increased role of hedge funds have transformed Chapter 11 from the 1990s, when companies such as discount retailer Bradlees spent years protected from creditors.

"It used to be a roach motel," said Melissa Jacoby, a professor at the University of North Carolina School of Law. "If anything, the worry now is some cases go too quickly."

For example, it took just four business days for vodka maker Roust Corp, which owns the Russian Standard brand, to get a plan approved last month in one of the shortest cases ever. The company was stung by the sharp fall in the Russian rouble last year and spent nine months hammering out a prepackaged bankruptcy plan with noteholders to cut $462 million in debt.

By the time it filed, everything was done but court review.

Last year there were 11 prepackaged bankruptcies, the most ever, according to a database of public company filings since 1979 maintained by UCLA Law School professor Lynn LoPucki.

Prepackaged plans limit risk and curtail the fees charged by lawyers and other professionals, which often top $1,000 an hour. The strategy works best when a company's plan affects a small number of creditors, but is less successful when companies need to cut debts to a large number of suppliers or landlords.   Continued...

A RadioShack store is pictured in the Manhattan borough of New York January 15, 2015. Electronics retailer RadioShack Corp might prepare to file for bankruptcy protection by next month, the Wall Street Journal reported citing people familiar with the matter. RadioShack was not immediately available for comment. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS SOCIETY) - RTR4LKTL