Source: Daily Bankruptcy Review
 
A prominent bankruptcy judge says he is concerned about the increasingly aggressive effort by lenders to force quick sales of bankrupt companies, depriving other creditors of the chance to challenge the sales.
 
Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., one of the nation’s leading bankruptcy courts, said lenders are demanding “highly expedited” sales of businesses, sometimes on the first day a company appears in court after filing for bankruptcy.
 
“I am finding that secured creditors are taking it to too much of an extreme,” Gross said at a bankruptcy conference here on Thursday. “They don’t have to come on the first day and push, push, push to get the bid procedures in place. It could be a little bit more magnanimous.” With lenders calling for quick sales, Gross said, other creditors in a bankruptcy case are left with a “very, very minimal” amount of time to scrutinize the auction rules and possibly challenge a secured lender’s lien on a company’s assets.
 
“It becomes for the judge just sort of a process of trying to rein in the secured lender a little to allow some time for a committee to be formed, to allow the committee to express its views and to allow, at a minimum, some fairness to the process,” he said.
 
The credit crisis has prevented scores of companies in bankruptcy from obtaining the financing necessary to pull off a restructuring and successfully exit Chapter 11. As a result, their pre-bankruptcy lenders, which often provide financing to the company while it’s in bankruptcy, see quick sales as a way to protect their collateral and ensure a recovery.
 
A spate of recent bankruptcies has resulted in speedy sales and liquidations. Retailers like Sharper Image Corp., RedEnvelope Inc. and Friedman’s Inc. all announced plans this year to sell their assets. Larger companies, too, have been affected. Leiner Health Products Inc., which filed for bankruptcy in March, is auctioning its assets this week, and auto-parts supplier Plastech Engineered Products Inc. recently announced plans to abandon its reorganization and sell its main businesses. Plastech has said its creditors favored a sale over a restructuring.
 
When companies sell assets, lenders can become the buyers, usually by taking advantage of their right to bid the amount of money they’re owed, a process known as credit bidding. Lenders have traditionally used credit bidding to protect their collateral if they don’t like the price it is being sold for, but it’s also used as an acquisition tool by distressed investors. Those investors, including hedge funds, often loan to troubled companies with an eye toward taking control of them.
 
At the Association of Insolvency & Restructuring Advisors’ annual bankruptcy conference, Marc Puntus, a managing director at Miller Buckfire & Co., said asset sales that involve credit bidding by lenders can lead to “an expeditious resolution” of bankruptcy cases. When various debtholders of a company face the prospect of no recovery in a bankruptcy case, credit bidding allows a lender to get out and avoid intercreditor fighting.
 
“I think you’re going to see more of those cases where first-lien debt is clearly under water, and there’s no need to extend the Chapter 11 case and incur professional fees,” he said.
 
Gross said lenders are less inclined today to allow a company to languish in bankruptcy for long because they are “throwing good money at very, very bad money.” Still, he said, lenders shouldn’t ask for sales on the first day of a bankruptcy unless the value of an asset is wasting away, making a quick sale “absolutely necessary.”