Bankruptcies shifting to corporate sector

Gary W. Marsh is a busy man these days.

As the economy has worsened, Marsh, a corporate bankruptcy attorney and partner at the Atlanta firm McKenna Long & Aldridge, has seen his workload increase dramatically.

“My phone is ringing off the hook,” said Marsh, who has been practicing for 25 years. “Bankruptcy is always hot when the economy is down, and it’s as busy as I’ve ever been.”

By all accounts, that’s not going to let up anytime soon.

The American Bankruptcy Institute expects overall bankruptcy filings — business and consumer combined — to exceed 1.4 million this year, compared with the 1.1 million recorded in 2008.

While consumer bankruptcy has been the focus of much of the concern since the recession started, attention is shifting to the corporate sector, particularly the commercial real estate business, which bankruptcy attorneys project will produce the next wave of filings.

General business bankruptcy filings soared 54 percent to 43,546 cases nationwide last year, up from 28,322 in 2007, statistics from ABI show. That’s the highest since the 44,367 cases filed in 1998.

Georgia mirrors the national average with 2,237 corporate bankruptcy filings last year, up from 1,456 in 2007. That’s a jump of 53.6 percent.

Not a simple undertaking, bankruptcy — usually a company’s last resort — can take years to resolve. It’s also expensive.

Companies generally file Chapter 11, which allows them to keep their management in place, reorganize debts and obtain new financing. Chapter 7 is a liquidation of a company’s assets if it’s apparent that reorganizing won’t fix systemic problems.

“It’s not a particularly happy prospect or one that people enter lightly,” said Dennis J. Connolly, a partner at Alston & Bird and head of the Atlanta firm’s bankruptcy, workouts and reorganization practice.

Connolly has advised both debtors and creditors. Getting both sides to the negotiating table outside of bankruptcy court is optimal, but filing for protection can help an ailing company survive while it seeks out options, he said.

“It is a tool to preserve and maintain the value of the enterprise,” Connolly said.

Preserving value — or what’s left of it — is a factor for creditors as much as it is for the company contemplating bankruptcy. It explains why creditors and distressed firms retain forensic accountants. They’re hired to comb through the company books to get a true sense of what assets exist and their value.

“What was the problem that put the company into trouble,” said Perry M. Mandarino, a partner at PricewaterhouseCoopers Transaction Services. “Is it high costs? Bad management? Regulatory issues? It’s a combination of events; you need to look at the internal and external that are leading to the problems.”

Accountants’ findings can help determine if the financially troubled firm should voluntarily seek bankruptcy or whether creditors should force the company into Chapter 11.

“There’s a forensic investigation or review initiated to find out what happened to the money,” said Ian Ratner, a partner and principal with GlassRatner Advisory & Capital Group. The Atlanta-based firm consults on bankruptcy and restructuring, forensic and litigation accounting, and mergers and acquisitions.

“In some cases, it’s a good company, just circumstances,” Ratner said, explaining that, when gas prices soared last year, alternative energy firms were doing very well. But with prices receding since then, some of those firms are financially struggling.

Bad decisions explain financial problems in some situations, he said. He described one situation in the financial sector where banks and loan officers would make new loans to borrowers who had problems repaying. The idea was those borrowers would use the money from the new loans to bring the old loans current.

Filing can have its advantages for troubled firms. Many deals are negotiated in bankruptcy. And since most companies file Chapter 11, they’re protected from the forced sale of corporate assets.

Atlanta-based Delta Air Lines, which filed for bankruptcy protection in late 2005, had $18.6 billion in debt and long-term leases. When it exited bankruptcy in 2007, it had less than $10.9 billion in debt and long-term leases.

But HomeBanc Mortgage Corp., which sought Chapter 11 protection in the summer of 2007, was not so lucky. The once-high flying residential home mortgage lender had its petition converted to Chapter 7 liquidation in February.

Still, if a company can’t meet its obligations to all stakeholders, there’s no

real other choice.

“You can’t service the bondholders; you can’t pay back the borrowings; you can’t produce profitable returns. There’s a certain amount of roadblock,” Ratner, the accountant, said. “And the only way to move on is to reorganize.”