Time is fast running out before the Oct. 17 change in bankruptcy law that will likely make Chapter 11 restructuring more difficult for companies. Bankruptcy experts say a few large stragglers might still squeeze in Chapter 11 filings before then, but they say there probably won't be the kind of last-minute scramble seen among individual filers. Personal filings topped more than 102,000 last week, according to Lundquist Consulting Inc., roughly triple the weekly average in recent years. The law's timing has certainly affected decision-making at some big companies. Perhaps the best example is Delphi ( DPHIQ), whose Chapter 11 filing last weekend was the largest ever by an auto-parts supplier. Robert S. Miller, the restructuring veteran who took Delphi's helm in July, set Oct. 17 as a deadline for that company to file if it couldn't secure a bailout plan from its biggest customer and former parent, General Motors ( GM), along with big concessions from the United Auto Workers Union. He reportedly said he didn't want to be a "guinea pig" for the new law. The coming bankruptcy changes were also a factor in Northwest Airlines' ( NWACQ) decision to file for Chapter 11 on Sept. 14, although the company's CEO said the post-Hurricane Katrina fuel spike was the immediate catalyst pushing the No. 4 U.S. carrier over the edge. A slew of provisions is likely to make restructuring more difficult for companies under Chapter 11. Perhaps the biggest change puts an 18-month limit on the period of exclusivity when a bankrupt company's management can file a reorganization plan. After that, creditors, unions and other parties will be free to offer competing plans.
Tectonic Shift?The existing law has a 120-day exclusivity period, but bankruptcy judges routinely extend this, giving some companies an almost indefinite period to come up with a plan. A case in point is UAL's ( UALAQ) United Airlines, which took more than two-and-a-half years to file its plan.
In July, Gerald Grinstein, Delta Air Lines' ( DAL) CEO, said Oct. 17 wasn't a factor in his thinking about whether to seek bankruptcy protection. But analysts have said Delta, which made its filing the same day as Northwest, likely wanted to get in to bankruptcy court ahead of the new rules. Even including the big Delta and Northwest filings, however, bankruptcy filings by public companies haven't seen a big surge over last year. By the end of September there were a total of 65, according to BankruptcyData.com. Although that was up from 57 in the same period last year, this year's pace trails behind other recent years. Since Sept. 30, only a few public companies have filed for Chapter 11. Aside from Delphi, they're not large. Tectonic Network ( TNWK), which provides commercial real estate information services and filed for bankruptcy early this month, had total assets of just $14.2 million at the end of March. And Epixtar ( EPXR), a call-center operator that filed Oct. 6, had total assets of $30.4 million at the end of June. Getting a handle on all business bankruptcy filings, including those under Chapter 7 and those by private firms, will take time. The government typically takes about two months after the end of a quarter to compile court statistics, meaning third-quarter data won't be available until at least November. The most recent government figures reveal a 6% year-over-year increase in all business bankruptcy filings to 8,736 in the second quarter. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which President Bush signed into law in April, focuses on making it more difficult for individuals to file for Chapter 7, under which they can wipe out their debts. The new shorter period that will take effect on Monday will turn up the heat on existing managers at all bankrupt companies, experts say. However, it could make restructuring particularly difficult at large companies in industries like airlines and auto manufacturing, says Lee Smith, a member of the bankruptcy practice group at law firm Thacher Proffitt & Wood in New York. Such companies often seek union concessions and try to shed pension plans, processes that can take a long time.