Corporate Bankruptcy Filing - The Inevitable Chapter

(RTTNews) - Though stigmatizing, companies, which are victims of a softening economy, file for voluntary bankruptcy under Chapter 11, a move that will provide some relief from creditor harassment. A bankruptcy filing does not necessarily mean death knell for a company.

A number of financially distressed firms that filed for Chapter 11 protection have successfully exited bankruptcy. But some firms entering bankruptcy simply disappear into oblivion. Unlike Chapter 7 filing in which the company's assets are sold to pay off creditors, Chapter 11, a shrewd business strategy, allows a company to conduct business, while it creates a plan to repay creditors.

Based on the data from BankruptcyData.com, here are some of the most talked-about high-profile U.S. corporate bankruptcy filings, listed in descending order by value of assets.

Lehman Brothers Holdings Inc.

The bankruptcy filing of troubled investment bank Lehman Brothers Holdings Inc. on September 15, 2008, is the biggest in corporate history, in terms of assets held, dwarfing the earlier ones. Crushed by heavy debt and steep losses tied to mortgage-backed securities, the 158-year-old investment bank entered into bankruptcy after Bank of America Corp. (BAC | Quote | Chart | News | PowerRating) and Barclays plc. (BCS, BARC.L), which were considered the potential suitors for Lehman, walked out of the deal. As of May, 31, Lehman Brothers had $639 billion of assets and $613 billion in debt.

Driven by gross mark-to-market adjustments stemming from write-down on commercial and residential mortgage and real estate assets, Lehman had forecast a net loss of about $3.9 billion or $5.92 per share for the third quarter ended August 31, 2008, compared to a net loss of $2.8 billion or $5.14 per share for the second quarter of fiscal 2008 and net income of $887 million or $1.54 per share for the third quarter of fiscal 2007.

Lehman's last hope to remain solvent went awry when South Korea's state-run Korea Development Bank, or KDB, abandoned its plans to buy a stake in Lehman on September 10. According to reports, the KDB was planning to buy a stake of up to 25% in Lehman for about $6 billion.

The trading assets of Lehman are currently estimated to have a value of $72 billion, while its trading liabilities are estimated to have a value of $68 billion. In recent developments, U.K.'s third largest bank Barclays, on September 17, agreed to acquire Lehman's New York headquarters and two data centers for about $1.5 billion and its North American investment banking and capital market operations for $250 million.

WorldCom Inc.

Nearly a month after disclosing an additional $3.3 billion in accounting errors, in addition to an earlier accounting fraud of $3.8 billion, telecommunications company WorldCom Inc. filed for Chapter 11 bankruptcy protection on July 21, 2002. At the time of filing, WorldCom had $103.9 billion in assets and over $41 billion in liabilities.

As part of reorganization, WorldCom changed its name to MCI Inc. in 2003. The debt load of the newly reorganized company was reduced to $5.7 billion, while its cash totaled $6 billion. The following year, on April 20, WorldCom exited bankruptcy protection under the name of MCI Inc.

In February of 2005, MCI agreed to be acquired by Verizon Communications Inc. (VZ | Quote | Chart | News | PowerRating) for about $6.6 billion. The same year, the former WorldCom CEO Bernard Ebbers was sentenced to 25 years in prison for his role in the accounting scandal and on September 26, 2006, began serving his sentence. An intense bidding war between Qwest Communications and Verizon, made Verizon to raise its offer price for MCI to $8.6 billion. The transaction was finally closed in January 2006.

Enron

Loaded by a debt of $16 billion, the once high-flying energy firm Enron Corp. filed for bankruptcy protection on December 2, 2001. Enron slipped into bankruptcy mainly because of accounting irregularities. Enron is best known for abusing Special Purpose Entities, a specific form of off-balance sheet financing, which helped the company to efficiently raise debt, while hiding its debt exposure. With assets of $65.5 billion, Enron's Chapter 11 filing is the third-largest bankruptcy in history, behind only Lehman and WorldCom.

In May 2006, the company's former CEOs Kenneth Lay and Jeffrey Skilling were convicted on charges including securities fraud, making false statements, and conspiracy that brought about the downfall of Enron. However, even before sentencing, Kenneth Lay expired on July 5, 2006 and his conviction was vacated. Skilling began his prison sentence of 24 years and four months in December of 2006. Enron emerged from bankruptcy in November 2004.

As part of a reorganization plan, Enron changed its name to Enron Creditors Recovery Corp., to reflect its mission of obtaining the highest value from the remaining assets and distribute the proceeds to its creditors. The company will cease to exit once it has completed all outstanding litigation, monetized all assets and made a final distribution to creditors.

Conesco Inc.

Saddled with $6.5 billion in debt and poked by the SEC investigation related to its accounting practices, life insurance company Conesco Inc. filed for bankruptcy protection on December 17, 2002. Conesco listed assets of $61.39 billion at the time of its bankruptcy filing.

The company emerged from bankruptcy on September 9, 2003 with a new capital structure consisting of a $1.3 billion secured bank facility; new convertible preferred stock with an aggregate liquidation preference of approximately $860 million; new warrants to purchase 6 million shares of common stock at an exercise price of $27.60 per share; and approximately 100 million shares of new common stock. The company's former common stock symbol CNCEQ was cancelled and its shares were listed on the New York Stock Exchange under a new symbol CNO. For the past 52 weeks, the stock has been trading in the range of $3.06 - $16.26 and at last check was at $7.95.

Pacific Gas & Electric Co.

As cost of wholesale electricity outpaced the retail prices due to deregulation law of 1998, which prevents the higher costs to be passed on to customers, the California utility Pacific Gas and Electric Co., collapsed into bankruptcy on April 6, 2001. Pacific Gas and Electric Co., is a subsidiary of the nation's largest utility holding company, PG&E Corp. (PCG | Quote | Chart | News | PowerRating). At the time of bankruptcy filing, Pacific Gas and Electric Co. had $12 billion in debt and $36 billion in assets.

Pacific Gas and Electric Co. emerged from bankruptcy on April 12, 2004 after paying creditor claims totaling $10.2 billion. For the first-half of fiscal 2008, Pacific Gas and Electric Co. reported net income $549 million, up from $535 million in the year-ago period. PG&E Corp.'s consolidated net income for the first six months of 2008 was $517 million or $1.42 per share, compared to $525 million or $1.45 per share in the year-ago period. Operating revenues surged to $7.31 billion from $6.54 billion in the comparable period a year before.

Texaco Inc.

Oil company Texaco Inc., which until 1958 was known as Texas Fuel Co., filed for bankruptcy protection on April 12, 1987, following an unfavorable ruling awarded to it in a suit filed by Pennzoil in 1984. The case involved the buyout of Getty Oil.

In 1984, Getty Oil, which agreed to a merger with Pennzoil walked out of the deal when a substantially better offer was tabled by Texaco. Pennzoil filed a case against Texaco for illegally interfering in its existing contractual relations and in 1985, a Texas jury ruled in favor of Pennzoil, granting $10.53 billion, plus interest in damages. The following year, a Texas Appeal court reduced the verdict to $1 billion. But the Supreme Court on April 6, 1987, invalidated the Texas Appeal Court ruling. Having forced to pay over $10 billion, Texaco collapsed into bankruptcy. The company had $34.9 billion in assets when it slipped into bankruptcy.

Nearly three months after Texaco filed for Chapter 11, Pennzoil agreed to a $4.1 billion cash settlement. Carl Icahn, who held a stake in Texaco, persuaded Pennzoil to lower the settlement price to $3 billion and the unprecedented legal battle came to an end in early 1988. On April 8, 1988, Texaco emerged from bankruptcy. Texaco was acquired by Chevron for $39 billion in 2000 and the combined company was named Chevron Texaco. In May 2005, Chevron Texaco renamed itself Chevron Corp.(CVX | Quote | Chart | News | PowerRating).

Refco

Three months after going public, commodities and financial-markets broker Refco filed for Chapter 11 protection on October 17, 2005. Refco's assets at that time were valued at $33.3 billion and the amount owed to creditors totaled $16.8 billion. A multi-year financial fraud orchestrated by Refco's CEO and chairman, Phillip Bennett brought about the downfall of the company. Bennett had hidden $430 million in bad debt related to credit extended to hedge fund clients. The company had long been under the scrutiny of the SEC for accounting irregularities.

In November 2005, Refco's regulated futures brokerage subsidiary, Refco LLC was acquired by UK-based hedge fund manager Man Group plc. The same month, Bennett was indicted on several counts of securities fraud. He was sentenced to 16 years in prison on July 3, 2008.

In June 2006, Austria's BAWAG bank, one of Refco's largest creditors, which owned a 10% stake in Refco from 1999 to 2004 admitted to have had a role in the shady deals of Refco, agreed to pay $675 million in settlement to be distributed to creditors and beleaguered shareholders of the defunct Refco.

IndyMac Bancorp Inc.

Less than three weeks after it was seized by federal regulators due to a massive run on deposits, mortgage lender IndyMac Bancorp Inc. filed for Chapter 7 bankruptcy protection on July 31, 2008, seeking to liquidate its remaining assets. The company incurred heavy losses from defaulted mortgages.

According to the Chapter 7 filing, IndyMac's assets totaled $32.7 billion and its liabilities range between $100 million and $500 million. Federal Deposit Insurance Corp., or FDIC, has taken over the operations of IndyMac, since its seizure and is running the company under the name IndyMac Federal Bank. IndyMac had $19 billion in deposits when it was taken over by FDIC, out of which $1 billion is covered by FDIC insurance.

Global Crossing Ltd.

Hurt by a sluggish demand and declining prices for bandwidth capacity, and burdened by a heavy debt load, telecom company Global Crossing Ltd. (GLBC | Quote | Chart | News | PowerRating) filed for Chapter 11 bankruptcy on January 28, 2002. At the time of filing, Global Crossing had $30 billion in assets and $12 billion in debts.

In December 2003, Singapore Technologies Telemedia acquired a 61.5% equity share in Global Crossing for $250 million, paving way for the troubled telecom company to exit Chapter 11. In addition, Singapore Technologies Telemedia agreed to purchase $200 million in senior secured notes that were meant to be distributed to former creditors. Global Crossing used the $200 million cash to pay off its creditors.

The company emerged from bankruptcy on December 9, 2003. By the time, Global Crossing exited bankruptcy, its debt was reduced to a mere $200 million from $11 billion at the end of 2001, including $1 billion of Asia Global Crossing debt. As of the most-recent quarter ended June 30, 2008, Global Crossing's total debt was $1.45 billion and for the past 52-weeks, the shares have been trading in the range of $14.54 - $24.75.

Calpine Corp.

Unable to make loan and bond payments due to soaring natural gas prices, geothermal power producer Calpine Corp. (CVN | Quote | Chart | News | PowerRating) filed for bankruptcy under Chapter 11 on December 20, 2005. At the time of filing, Calpine had $17 billion in debt and $27 billion in assets.

In 2005, natural gas spot prices were at record highs, but due to long-term contracts, the company was able to sell power only at below-market prices. In conjunction with the bankruptcy filing, Calpine received commitments for up to $2 billion of secured debtor-in-possession financing* from Deutsche Bank and Credit Suisse First Boston, joint lead arrangers and joint book runners. (Financing arranged during the time when a company is in Chapter 11 bankruptcy).

Calpine emerged from bankruptcy protection on January 31, 2008. Under the reorganization plan, the company reduced its debt by $7 billion, closed a $7.3 billion exit financing facility and slashed its workforce to 2,200.employees from about 3,300. Calpine's old common stock was canceled and holders of the old common stock received warrants to purchase new Calpine common stock for an exercise price of $23.88 per share. Calpine shares, which were trading around $60 in 2001, are now trading around $15.

UAL Corp.

Hurt by a slumping economy and the 9/11 terrorists attack, United Airlines Inc., a subsidiary of UAL Corp.,(UAUA | Quote | Chart | News | PowerRating) unable to make a debt repayment of $920 million, filed for Chapter 11 bankruptcy protection on December 9, 2002. The company's efforts to stay out of bankruptcy were thwarted, following the rejection of its request for $1.8 billion in federal loan guarantees by the Federal Air Transportation Stabilization Board. At the time of filing, United Airlines had $25.2 billion in assets and $30 billion in debt.

The airline was reeling under a loss since 2001. Among the four planes that were involved in September 11 terrorists' attacks, two were United Airlines' planes. One crashed in Shanksville, Pennsylvania and the other hit the World Trade Center, that fateful day. That year, the company lost $2.14 billion and the loss further widened to $3.21 billion in 2002.

After spending more than three years under bankruptcy protection, United Airlines exited Chapter 11 on February 1, 2006. As part of the reorganization plan, during the three-year bankruptcy period, United Airlines slashed its headcount to 58,000 from 83,000, terminated employee pensions, reduced its debt to $17 billion from $30 billion and lowered its average annual costs by $7 billion. As of December 31, 2007, United Airlines employed 55,000 people.

In May of this year, UAL Corp. abandoned its merger talks with US Airways Group. The company is taking a number of steps in response to the sky-rocketing fuel prices and a weakening economic environment. As part of the measures to combat higher fuel costs, the company will permanently remove 30 narrowbody, old and least fuel efficient aircraft from its operations.

United Airlines expects to reduce its salaried and management workforce by 500 employees and its represented workforce by approximately 600 employees by year-end and is now targeting $400 million in non-fuel cost savings.

Delta Air Lines Inc.

After flirting with bankruptcy filing in October 2004, Delta Airlines succumbed to the inevitable on September 14, 2005 when it entered Chapter 11, unable to keep pace with soaring fuel prices and growing competition from discount carriers. Delta's assets at the time of filing totaled $21.8 billion and its debt was $20 billion.

From 2000 through June 2005, Delta lost over $10 billion. In January of 2007, Delta obtained commitments for a $2.5 billion exit financing facility, as a significant step towards exiting bankruptcy. The exit facility was co-led by six financial institutions - JPMorgan, Goldman Sachs & Co., Merrill Lynch, Lehman Brothers, UBS, and Barclays Capital. After a 19-month reorganization, Delta emerged from bankruptcy protection on April 30, 2007.

Delta improved productivity and eliminated approximately $2 billion in annual costs during the bankruptcy period. The company's total debt and capital leases reduced to $9 billion by the end of 2007. During the bankruptcy period, Delta also fended off a hostile $10 billion takeover bid by rival US Airways Group Inc. (LCC | Quote | Chart | News | PowerRating).

Delta, which emerged as an independent carrier from bankruptcy, has agreed to acquire Northwest Airlines Corp. (NWA | Quote | Chart | News | PowerRating) for $3.1 billion, a deal which will result in the world's largest airline. The merger is targeted to close during the fourth quarter of 2008.

Conclusion

For a financially distressed company, bankruptcy filing offers two options - liquidation and reorganization. While Chapter 7 filing allows for liquidation of assets, Chapter 11 is mostly used when the company intends to reorganize its business. According to the Administrative Office of the U.S. Courts, total business filings increased to 28,322 in 2007 from 19,695 in 2006. Chapter 11 filings reached 6,353 in 2007, up from 5,163 in 2006.

As of date, Lehman Brothers' bankruptcy filing is the biggest in history. With sky-rocketing commodity prices, tightening credit and slowing economy, it remains to be seen how many more companies will make a beeline for the bankruptcy courts seeking protection under Chapter 11 in the days ahead. Wait for the inevitable!

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