WASHINGTON, D.C. -- Tough new revisions in the corporate bankruptcy code take effect Monday, Oct. 17, and that may prompt some companies pondering bankruptcy to move before then.
The new rules, signed into law in April as part of a bill to tighten personal bankruptcy filings, place limits on the extensions for a debtor to file reorganization plans and the time a debtor may take to assume or terminate commercial land leases. It also severely restricts key employee-retention programs, among other things, according to a report in The Wall Street Journal.[image-nocss]
And though near-record-low default rates mean fewer companies overall are in such dire straits, some companies already struggling to stay afloat are warning bankruptcy filings may come sooner rather than later.
Last week, the chief executive of embattled auto-parts giant Delphi Corp., Robert "Steve" Miller, said the company was considering a bankruptcy filing. Delphi, which this month drew down $1.5 billion of its $1.8 billion revolving credit line, said the new bankruptcy laws wouldn't be favorable to the company.
Two weeks earlier, Northwest Airlines Chief Executive Doug Steenland said in an earnings conference call that the pending bankruptcy-code changes were on the mind of management as it tries to get its unions to agree to concessions to keep the carrier flying.
The new rules make it easier for some creditors to get paid after a bankruptcy filing, which has the consequence of limiting the breathing space for the insolvent company. As a result, companies facing an uncertain future may decide to file before the new provisions go into effect.
"Under the new code, it's less likely that they can survive after Chapter 11" as opposed to undergoing a liquidation, Edward Altman, director of the credit and debt markets program of the Salomon Center at New York University Stern School of Business, told the WSJ. Altman expects to see a small spike in the number of bankruptcies from companies that are facing a financial crunch before the new rules go into effect.
"I think we'll see some major corporate bankruptcies between now and October as companies choose to avoid dealing with the new bill," Robert Keach, co-chairman of the Business Reorganization Committee at the American Bankruptcy Institute, told the Chicago Tribune. "What you may find is that companies who were going to file anyway will file earlier to avoid what they consider the more difficult provisions of the new bill."
Critics of the new bankruptcy code say it will result in more liquidations, potentially hurting the economy as companies disappear rather than slim down and re-emerge. One sector seen as being particularly affected by the new rules is the retail sector, given the size of its commercial lease agreements.
"The new rules make it easier for landlords, vendors of merchandise, utilities and tax authorities to get paid or to reclaim their wares soon after the bankruptcy filing," Martin Fridson, publisher of Leverage World, a research service focusing on the high-yield bond market, wrote in a recent op-ed piece carried by Dow Jones Newswires. "This is contrary to the spirit of giving the insolvent company some breathing room."
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