Restructuring The Overleveraged Energy Company
Many merchant power companies are in talks this year to restructure their debts. Standard & Poor’s has estimated that $90 billion in medium-term loans will come due in the US power sector in the period through 2006. Chadbourne hosted a workshop in Houston in late April at which two participants took the roles of a power company trying to renegotiate its debts with a bank syndicate that made the loans. Stephen Cooper played the role of the power company. Cooper is currently chief restructuring officer and interim CEO of Enron Corporation. He has had many other prominent assignments over the years, including the restructuring of Polaroid, Federated Department Stores and Laidlaw. Joseph Smolinsky, a Chadbourne bankruptcy partner, played the role of the bank syndicate. The workshop was led by Howard Seife, head of the bankruptcy and restructuring department at Chadbourne in New York.
MR. SEIFE: Our program today involves role playing. The idea is — through the give-and-take between Steve Cooper and Joe Smolinsky — to give you a feel for what happens in the debt restructuring process. We are going to take you from A to Z in a debt restructuring for a troubled company, from the initial stages of the negotiation to what we hope is a successful conclusion.
It is important before we start to understand the following about the company. Our hypothetical company — Power Co. — is a large, diversified, publicly-traded Fortune 500 company. It grew substantially in recent years. In addition to being a holding company and providing traditional energy services through a number of subsidiaries, it also developed diversified ancillary businesses.
One of its subsidiaries is Electric Co., which generates and transmits electricity throughout the midwestern United States. These are highly-regulated operations under the jurisdiction of the Federal Energy Regulatory Commission and local public utility- commissions.
Another subsidiary is Pipeline Co., which provides transportation and distribution of natural gas.
Another subsidiary is Generator Co., which operates merchant generation facilities throughout the United States. Many of its projects are still under construction at various sites. The future funding requirements of these facilities are, in many cases, guaranteed by the parent company. The structures used to finance the projects vary. They can be synthetic leases or traditional construction loans.
The company has also established a Trading Co., which engages in third-party marketing and trading. It trades natural gas and electricity and it uses third-party derivative financial instruments to hedge.
There is also a subsidiary that does construction work — generally constructing merchant energy facilities and power plants for other companies. Often performance of the construction work is guaranteed by surety bonds, and those bonds are guaranteed also by the parent holding company.
Finally, we have the catch-all subsidiary, Finance Co., that provides a variety of financial and consulting services and even has a commercial real estate portfolio. Thus, the structure is the fairly typical holding company structure with each of the different operations in a separate subsidiary. In many cases, the subsidiaries have their own financing relationships.
As is typical with companies that have expanded and acquired new businesses in recent years, the company has incurred substantial amounts of debt. To give you a snapshot of the debt today, here is a bank revolver of $200 million. There is a bank term loan of $1.3 million, and there is a big amortization payment due next year that is looming for the company. There are also senior notes. Those are due in 2010 in the amount of $500 million. And underneath are senior subordinated notes in the amount of $200 million, and those are coming due next year as well. In short, a looming payoff or refinancing will be required.
In addition, off balance sheet, there are synthetic leases that are financings used to construct the power plants at the subsidiary level, and those leases are guaranteed by the parent. That is an additional $800 million of debt. In addition, there are various unliquidated claims, including litigation pending, performance guarantees, offtake guarantees, indemnities, employee benefit obligations, and those are largely unquantified but substantial liabilities.
The company is having problems. Recent events include losses at the Trading Co. And to make matters worse, there has been tremendous volatility in the gas and electric power markets, and volatility is cutting into profits at Electric Co. and Generator Co. In addition, the company is being investigated by the US Securities and Exchange Commission, and there are class action lawsuits by shareholders who are unhappy with the performance of the company and its reporting claiming that the financial reporting has been inadequate.
As a result of all these negative events, Moody’s and Standard & Poor’s have downgraded the public debt. The downgrade triggered collateral obligations at Trading Co. Finally, two more points: Power Co. recognizes that its balance sheet is overleveraged. And as it begins to violate financial covenants with its banks and as maturity date looms for repayment of its bonds, it is evident to the company that without a consensual restructuring or refinancing of its debt, it will have to file for bankruptcy. Furthermore, Vulture Co. has acquired 25% of the subdebt at a significant discount. And Power Co. suspects there has been significant trading in its other securities as well and that the market is discounting its prospects. This can all be summed up with the senior management sitting around the table, trying to figure out, “What happened to our mojo?”
So you understand the players and the roles that they will be playing, I am the omniscient moderator trying to stay above the fray. Eventually, I might turn into the bankruptcy judge. Steve Cooper will play the role initially of the chief executive officer of Power Co. Joe Smolinsky will represent the agent bank that has the substantial indebtedness about which it is becoming very concerned.
Steve Cooper, given the current situation, given your significant debt loads and the looming problems, what are you going to do?
MR. COOPER: We have no problems. (Audience laughter.) I would really set out to do just one thing, which is to buy time. And I know that to buy time I’m going to need some modest liquidity support from our banks because I’m absolutely convinced that if I can just postpone a few of these issues for six, nine or 12 months, that time really will work to the company’s advantage, and these problems will literally evaporate. Thus, my objective is to buy time.
MR. SEIFE: Joe Smolinsky, you are the agent bank. You have been lending to this company for many years. One might say you have been living off the fees of this company for many years.
MR. SMOLINSKY: I’m fat and happy.
MR. SEIFE: Right. That will end soon. (Audience laughter.) You see the problems I described and the sizable debt load. What is your response?
MR. SMOLINSKY: Every time I pick up the phone and give Steve Cooper a call, he always starts with the good news:“Six months from now, things are going to turn around. We’re having a little glitch now. We just need a little bit of help, and we’re going to get over the hurdles.” I know that lurking behind all of this good news is a looming problem. I see other similar companies having similar problems. I also want to buy time. I want a performing loan. I have to make sure that my 20-bank syndicate is kept informed, so that no one accuses me later of springing a surprise. Therefore, my first priority is to get better reporting. I want more control. I start thinking about new covenants that I can ask for in order to make sure that things don’t get worse. And I may ask for extra fees.
MR. SEIFE: Steve Cooper, you are starting to get a sense from your banks that they are growing uncomfortable. They see the same problems that you see. They are not as sanguine that time alone will cure things. They are not sure that the gas market is really going to shift to your advantage. You are even worried about your own position at the company. What are you going to do now?
MR. COOPER: It is becoming clear to me in my conversations with Joe that it will be difficult to tap the banks for additional liquidity. I am starting to realize that I need to assemble a team that can advise me on my options for moving forward with this situation. That will usually mean talking to either my existing law firm if it has the right restructuring capabilities, because I will need to have a good understanding of what the company’s rights are, what my rights are, what the board must do as we begin to brush up against a tighter and tighter liquidity, and what disclosures, if any, I’m required to make.
Therefore, I will place a call later today to our law firm. Following that call, I will more likely than not also call our financial advisers or investment bankers because I will need someone to break the ground for me in terms of going to our banks for waivers and articulating to them why this is just a matter of buying time. I am looking for a team that can help me convince the banks that extending additional liquidity is really not a problem. I will ask both the law firm and my investment bankers to work with me on a restructuring proposal, albeit, at this stage what I have in mind is just more liquidity. And if Joe continues to be as persistent as he was on his phone calls, I may begin to think about some fallback bankruptcy planning.
MR. SEIFE: One of the things that this crackerjack law firm that you have hired will want to make clear to your board is that when a company is in the realm of insolvency, fiduciary duties start to shift. The board has traditionally been mindful of its fiduciary duties to the shareholders. The board will get the speech from the lawyers that,“As your financial problems worsen and solvency may even be questioned, you will have fiduciary duties to creditors. If things don’t go well, the creditors will look to you as board members to make sure that you acted in their best interests and made all the right decisions.”
Joe Smolinsky, the banks have heard through the grapevine that the company is making some moves. It has hired restructuring counsel. It is consulting financial advisers. But it is still talking about buying time. What is your next step?
MR. SMOLINSKY: A meeting will be scheduled shortly with the company to start discussing what type of relief it wants and what type of relief the banks are willing to provide. Some of the banks in my group have started shifting this project to their workout departments, and I’m planning to do the same. I plan to have my workout department sit along with me in that first meeting, probably, and give me some advice about how this should play out from the bank perspective. This is somewhat undiscovered territory for me as the relationship loan officer for the Power Co. account. I’m also going to hire counsel. Most likely, I will also need a financial adviser. I want to make sure that I can get the protections that I need for the rest of my bank group from the company.
I am going to want an indemnity from the company, for example, for any discussions that take place between the bank group and the lenders from a lender liability perspective. I am going to want a document to set out what our respective roles are. I am probably going to want the company to concede that there are events of default or facts that will turn into events of default if left uncured, to certify that there are no defenses against my claims, and perhaps some other representations as well.
I am also going to want to form a steering committee. This group of banks is too unwieldy. I make calls to 20 banks after each development, and I certainly cannot have 20 banks at the first meeting. I will lead steering committee. Its members will be a subset of the banks who are most interested in participating. I am going to start assessing the business so that I appear well informed before my steering committee before heading into that first meeting.
MR. SEIFE: The bank is hiring a law firm and hiring financial advisers. These professionals don’t come cheap. Who will pay for all of this?
MR. SMOLINSKY: My credit agreement requires the company to pay these fees, but I’m not going to rely on that. My mandate letter that I am planning to have the company sign will also provide for current payment of all of our professional fees, making clear that it includes financial advisers as well, because we are no longer talking about the cost merely of preparing a waiver. We are now talking about some serious money to understand the balance sheet of this company and what posture to take in our discussions.
MR. SEIFE: Steve Cooper, what’s your response? Will you sign such a letter that the bank puts in front of you? You are agreeing to indemnify it for its role in these negotiations? You are agreeing to pick up the tab for all its advisers? You are facing liquidity problems as it is.
MR. COOPER: I will hand it to my lawyer, and we are really going to buy time. (Audience laughter.) I see this particular letter as something that we will try to negotiate. But at the end of the day, this is something that I realize I must sign if I want to get the banks in a room and buy time. Therefore, we will negotiate the best deal we can in terms of the information we are prepared to share and the access we provide, how much we are prepared to pay, and for how long these arrangements will continue. At the end of the day, I don’t see that I have much choice.
MR. SEIFE: Joe Smolinsky has to show some progress to his management. He scratches his head and, like most bankers, he calls you up and says,“We need to meet. We need to hear what you as the company want to do. It’s your problem. You’re the one with the cash flow problems. We’re going to sit down together in a few days, and I want to hear from you what the company plans to do. How are you going to deal with the looming maturities in 2004? What are you going to do about your current liquidity problems? ” MR. COOPER: This is going to be an interesting meeting. My legal and financial advisers agree with my strategy of trying to buy time because that will allow our markets to bounce back, and we will be fine.
Therefore, our chief financial officer, our lawyers and our financial advisers will be heading to a bank meeting where they will put in a proposal that reflects this thinking. It will ask for more time — let’s say five years — to repay our debts. We will mitigate our current liquidity crunch by pushing out all of the near-term amortizations that are staring us in the face. I’m prepared to give a little on the interest rates, so we ratchet them up by 50 or 100 basis points. I’m willing, if really pushed to the wall, to consider giving up some collateral, but more likely than not just a stock pledge of a couple of the subsidiaries. I don’t want a lot of covenants.
We are still in a growth mode. I see that with the turmoil in the market, there are some additional acquisition opportunities. That’s why I don’t want to be tied down with restrictive covenants, and I certainly do not want to be forced to use my excess cash flow to repay debt as opposed to using it to take advantage of growth opportunities.
Therefore, our proposal to the banks will be nicely tailored to the buy-time philosophy that I believe is the solution here.
MR. SEIFE: Did I hear you right that you personally would not be attending that bank meeting, that you are sending your CFO?
MR. COOPER: Right. This is really not an issue. The senior executives in the company are more than capable of handling this.
MR. SEIFE: Joe Smolinsky, you are at the meeting. You have just heard the proposal from the CFO, and the CEO is back in his tower in Houston — or wherever he may be — and what’s your response? Is there a little denial going on here?
MR. SMOLINSKY: Clearly there is denial. As a banker, I know this is typical of any CEO of a distressed company. By nature, CEOs are optimistic. That’s why they’re successful. As a relationship banker, I may receive the proposal with some optimism that something can be worked out and,“Thank you very much,” but that’s when the workout banker steps in and sends the relationship banker back to writing new loans for other borrowers.
The banks will have several problems with extending the current maturities under the bank financing. We have the subdebt maturing in 2004. There is no reasonable way that the subdebt will be repaid in that timeframe. We also have these large litigation claims — unliquidated claims — looming. The banks are going to want some protection against those claims ripening to judgment within that fiveyear life span. The company may have offered stock pledges, something to placate the banks from the collateral side, but I know that stock pledges alone don’t necessarily provide the banks with much protection. They do not make for an easy foreclosure if we need to take the collateral. The problem with foreclosing on subsidiaries is they have other liabilities.
As a workout banker, I am not happy with the strength of the financials that have been presented to me. They are probably on the back of a cocktail napkin. I am used to seeing financial professionals who are experienced with workouts and know the format. I am interested in seeing how much money the company is throwing off, and not what the income statement shows. I want reports that can be delivered to me in a way that gives me the information I need.
I am starting to think about whether the current CFO is the right person with whom to be negotiating and to be discussing the future restructuring. I might ask the company to bring in a “chief restructuring officer” to support the work of the CFO.
I will also start looking at cost cutting. Does the company really need the three corporate jets? I am also concerned about acquisitions and the continued use of the company to finance new business enterprises in Finance Co. I am very concerned about the subdebt. I want to know what the company’s plans are with respect to the subdebt and the maturity in 2004.
Chief Restructuring Officer
MR. SEIFE: Joe, you mentioned bringing in a “chief restructuring officer,” and Steve Cooper, as a CEO who has never had any experience with a troubled company before, asked me, “What is this CRO? How does he fit in? Why do we need such a person?”
I explain to him that this is something that the banks need to get comfortable. He is someone who has gone through the restructuring process on numerous occasions. He is someone whom the banks probably already know and in whom they have confidence. He does not have a vested interest in the company. He has no stock options. He has no history with the company that he is trying to cover or mask. He is someone who can take a fresh look and decide what is and is not possible. Some CROs report directly to the board. Other CROs report to the CEO.
Thus, the company, knowing that it must do business with the banks, has acquiesced after a lot of give and take and agreed to appoint a CRO. The banks suggested two or three candidates with whom they would be comfortable. The banks have had to waive lender liability concerns because, if they force a CRO on a company and things don’t go well, they may be subject to lender liability-type lawsuits for imposing a turkey on the company who has gotten it into worse trouble. By giving the company the opportunity to choose among two or three candidates, to interview them and to get comfortable with them, the lender liability concerns are somewhat diminished.
At this point, Steve Cooper is going to change hats and act out the part of the CRO. Steve, as a CRO, how do you like to fit into the corporate structure? What are the pros and cons of the different ways of coming in?
MR. COOPER: There are one or two placements that are in vogue these days for CROs. One is to report directly to the board. When the CRO is asked to report directly to the board, he takes on responsibility for a couple of areas. One is the balance sheet, only because experience has shown that most CEOs have grown up on the operating side of a business. They understand very, very well the profit and loss statement and operations, but the balance sheet is oftentimes a mystery. The second thing the CRO does is become responsible for cash management, cash planning and cash forecasting, so that he can put a bridge between the balance sheet and operations. If the CRO reports to the CEO, we usually recommend that the CRO have primary responsibility over those two areas.
MR. SEIFE: As a CRO, do you come in as the Lone Ranger, or do you typically bring members of your firm with you to assist in the restructuring process? How do you deal with the interdynamics of current staff? How do they view you? How do you overcome the suspicions?
MR. COOPER: It is difficult to come in as the Lone Ranger. We work mainly with middle-market capitalized companies — $300 million and above. It is difficult for one person to get a handle on a company that size. So we typically bring a team.
As the company moves down that slope from stress to distress, there is a collapsing of resources. You find that with the overlay of trouble, the demands of the banks — they want information, want access, want this, want that, and if the other constituents get organized, they replicate those demands — rarely, if ever, does the company have enough time and human resources to do all of this on its own.
MR. SEIFE: Joe Smolinsky, you have shown progress. You are able to report up to your management that you have compelled the company to hire a CRO. The company has hired someone in whom you have confidence. You plan to give the CRO a two-week period to get his feet wet, to get his people in place, and to start reviewing operations. What are you going to do during this two-week process?
MR. SMOLINSKY: If this is a secured bank facility, I would probably be doing an extensive collateral evaluation at this point. But in our hypothetical, the banks are unsecured. So we are going to be putting together our team of lawyers and financial advisers. The financial advisers will be reviewing financial material received from the CRO and starting to understand the business. The bankers are concerned about the totality of the business. The debt is at the parent level. As long as there was enough money available, they did not have to worry about each individual business unit. However, now the focus is going to be on each business unit down the chain, what is valuable and what is not so valuable. The lawyers will be reviewing all of the documents not only at the parent level, but also at the subsidiary level. They will find that these power companies have very complicated project documents and financial documents. We have the synthetic leases that will have to be evaluated for the likelihood that those guarantees will become parent obligations. We have to make sure that there are no covenants in the subsidiary lending facilities that would preclude the granting of assets as collateral for our distressed loan.
MR. SEIFE: Steve Cooper, while the bank is doing that, you are at the company. You have your team in place. You know that you have a bank meeting coming up and the banks will want to see progress and a different approach. What will you do over this short-term period?
MR. COOPER: Three things. The first is to begin to stem the loss of credibility. The second is to make sure that we can present the company’s position and go-forward program in a clear, concise way. The third is —at every step of the way — make sure that we maximize the alternatives available to the company. Part of being able to restructure successfully is to ensure at every step of the way that you have not foreclosed alternatives that would otherwise be available to the company.
Specifically, we will spend the two weeks reevaluating the company’s business plan and projections. The banks either want their money back or they want to protect it. From the company’s perspective, we don’t want to — nor are we in a position to — give it back, and we want to give the banks to have as few protections as possible in order to ensure that our alternatives remain as broad and as deep as possible. We will retool the business plan, so as to show what concessions we are prepared to make — realistic concessions by way of acknowledging that it is our responsibility to do what we can to turbo-charge liquidity. We will modify the restructuring proposal to get back to planet Earth. If there is a dramatically different view of the company’s prospects that exists between the company’s internal world and the banking world, you have to bridge that. Otherwise, you will have a meltdown between two sides.
We will continue the bankruptcy planning to ensure we have the right leverage with our lending institutions. They are unsecured lenders. We will approach debtor-in-possession lenders that are not part of the banking syndicate.
MR. SEIFE: You made a point that this is an unsecured bank group. Would you approach this differently if the banks already had the available collateral?
MR. COOPER: Yes. By securing the assets, a couple of things happen. Number one, you have reduced your alternatives by way of additional borrowing, and you have hampered to whom you can go to for debtor-in-possession financing. If those assets are secured and there isn’t enough free collateral, the only group you can deal with are your existing lenders.
There is often a pixie dust view that you can convince a court to ignore their interests and bring somebody in over them. But by the time you win that fight, which is impossible to win in practice, it is no victory because your company will have melted down. The granting of collateral eliminates two or three alternatives that you might otherwise have had available.
MR. SEIFE: So where are we in our scenario? The CRO is involved. His team is involved, and it is carefully revising the business plan. It is revising the projections, it is ready to deliver all of that to the banks, and it is feeling pretty good. The CRO’s team has the business under control. It thinks it has realistic projections. And then, of course, the unexpected happens.
Out of the blue, one of the speculative trades that was in place — you may recall there is a subsidiary that does trading — went awry. Trading Co. calls the CEO on the phone, and he calls in the CRO.“We just lost $85 million. It’s absolutely all of our cash. It throws off all of our projections.” The CRO, being an experienced guy, knows that communication with the banks is paramount. He calls Joe Smolinsky and says,“We have some bad news. You know we have the trading operation. It moved the wrong way. We fired the guy, but we have a hole, and the projections that we have shown you, they don’t work any more.”
Joe has to tell his boss that things aren’t going as well as anticipated.
MR. SMOLINSKY: I am starting to see that things are getting serious. We will have to make wholesale changes in order to protect our claims. Steve Cooper is making me nervous because he now realizes, after talking to his lawyers and financial advisers, that if we banks don’t come to the table, he can file for bankruptcy protection under chapter 11 and then maybe bring in a DIP lender and pledge all the assets to our detriment. Therefore, I have to balance my need to get something corralled at the company to prevent further surprises with my need to come to a deal outside of bankruptcy.
One of the things I want him to do is to get out of the speculative trading. The company trading its own portfolio is considerably dangerous. With a flush balance sheet, perhaps it’s a prudent business for the company to be in. But now it’s just plain dangerous.
I also want the company to start thinking about selling assets in order to raise some liquidity, and perhaps to use a portion of the cash raised from asset sales to pay down debt. I’m also trying to assess whether I should condition a refinancing on meeting certain benchmarks — for example, getting out of trading by a certain date, selling assets by a certain date. Do I truly want this? It certainly improves my position, but I have to be concerned about tying management’s hands. Certainly Steve Cooper will tell me that he doesn’t want to agree to that because it will tie his hands. And he may be forced to sell out-of-the-money derivatives at large losses or sell assets at distressed prices.
I’m also looking for the business plan. I want the in-depth analysis that Steve can bring to the table to help us better understand what the alternatives are for the restructuring. There is one other thing that is looming large in my mind. We have a fairly large letter of credit facility and we have troubles at the subsidiaries. As a banker, I know that because of the downgrades in credit, counterparties are going to start requesting additional letters of credit that don’t currently exist. That will increase my exposure. Therefore, I will want the company to try to negotiate out of those letter of credit obligations or else find some way to reduce that contingent exposure.
MR. SEIFE: Of course, Steve Cooper’s response to the problem with the speculative trade was,“It wasn’t in our plan,” which, obviously, was the case. But Steve has now been in the company some time. He has worked into the business plan and the model this $85 million loss, and he has had time, with the CEO, to put together a serious restructuring proposal. He has listened to the banks. He has understood the concerns, and he also now fully appreciates the liquidity problems that the company has and realizes there are looming debt payments due next year. He has to buy more time and the ability to deal with those problems. Steve, lay out your business plan. How are you going to turn this company around?
MR. COOPER: Well, I know a couple of things by now. One is we can’t continue to follow business as usual. The other is, by this time, with any luck, we have gotten a very, very good handle in a very conservative case as to what the real liquidity needs of the company will be. That is essential because we’re going to have to focus now, both internally and externally, on how we fill the money gap.
One of the things I am convinced of is that there isn’t enough cushion — in terms of collateral or equity — to persuade the banks to pony up all of the liquidity needed to work our way through the crisis. With the speculative trade gone bad and the increasing demands of the banks — “Get out of trading,”“Begin selling assets” — distress levels have been ratcheted up a couple of additional degrees. At this next cut, we will look at a very, very, very conservative business plan, and we will begin to jettison projects or businesses that don’t make sense over the long haul. It will take too much capital to bring them to fruition. It is unclear, given the state of the markets, that they will provide the payback that we originally thought, and so on and so forth.
MR. SEIFE: Does that mean you are prepared to cease construction on a number of new merchant plans that are in the works?
MR. COOPER: Yes. Anything that doesn’t work at the moment and anything that requires enormous amounts of capital. In this particular case, we have a couple of power development projects and an Internet project. We will cut capital expenditures in this plan by a $1+ billion over the next several years.
MR. SMOLINSKY: You are not going to do it without asking me, right, because that would affect my claims against the parent?
MR. COOPER: This is presenting the business plan. So aggressive, these bankers. (Audience laughter.) They become more and more aggressive every step of the way. We will then look internally to the organization to see what other possibilities we have on the operating side of the business, whether it be head count reduction, whether it be the ability to squeeze operating and maintenance budgets, travel budgets, expense budgets. Anything becomes fair game to reduce the outflow of cash and to begin to build and maintain liquidity. We would, in that event, incur a benefit on one side which is the cost reduction or the head count reduction. The offsetting side of the ledger is employee severance costs.
We would look to asset sales and see what, if anything, makes sense to dispose of or to unwind or to defer commitments in order to bring in cash sooner rather than later.
If the bank agreements do not require it or, said differently, if the banks are unsecured lenders and there are no prepayment provisions in the loan documents, I would ensure that when I got my hands on that cash, the cash is deposited in a bank that has no link to the 20 banks in our lender syndicate.
I will also look at the current side of the balance sheet to see what, if anything, can be done to accelerate the collection of receivables and what, if anything, can be done to decelerate the outbound flow of cash by way of payables.
MR. SEIFE: Does that mean you’re stretching your trade creditors?
MR. COOPER: It means I’m stretching the trade creditors because, again, the name of the game is to preserve optionality, and to the extent you have no cash and no liquidity, they have you as opposed to you having them, particularly if the facilities are unsecured. The real mission is not only to describe the business going forward, but also to have a very precise handle on how that business is going to reflect prioritizing the creation of liquidity.
Once you see what you can provide from internal sources — the canceling of projects, the disposition of assets, the cost reductions, squeezing the balance sheet — you can then quantify the money gap and how much cushion will be required to pull through. We will then go back to the bank group with more realistic pricing. Obviously, we will be looking to perform against this plan. They will want to figure out how to ensure our performance. They will do that through tighter covenants.
If we are asking for additional liquidity — which has to be real as opposed to tied up in a legal document that looks like you get it but you really can’t get your hands on it — we will consider offering up additional collateral.
MR. SEIFE: Steve Cooper has now put his proposal to the banks. And this isn’t quite how he presented it:“That’s our final offer,” which is never a good negotiating tactic. But while the banks are considering the proposal, we have another adverse change. We have a spike in the natural gas prices. And, again, that wreaks havoc with projections because this company is heavily dependent on natural gas. It has not fully hedged its position to protect against a change in prices. Once again, Joe Smolinsky has to tell his management that the projections do not work any longer. The business plan is flawed, and there is an even greater liquidity crisis looming.
Steve Cooper has to pull yet another rabbit out of his hat. We can now see clearly down the road the possibility of running out of cash if natural gas prices don’t come down. Worse, if gas prices rise further, the company will be in serious trouble.
It’s back to the drawing board for Steve. You will have to redo the projections once again. Joe, what is the reaction among the banks, and how do you view the proposal that was put on the table?
MR. SMOLINSKY: The most exciting thing that I have heard is that the company might be willing to give up some collateral. I realize that there is a lot of debt all around me, and I want to be at the top of the heap. My best way of getting protection, even if this plan ultimately comes crashing down, is to grab some collateral. But I’m not so sanguine that he will be able to deliver enough collateral to make me happy. While he certainly has valuable assets in the form of, for example, the gas pipeline, it belongs to a joint venture and I’m not sure yet how he will be able to deliver that as collateral.
The Generator Co. and Utility Co. have merchant power plants, but they have their own financing that probably includes negative covenants that prevent pledges. And there may be regulatory restrictions on the ability to pledge those assets anyway. Likewise, since this is a holding company that we have claims against, we’re looking to take pledges from subsidiary corporations.
I am concerned about the possibility that upstream pledges will be viewed as fraudulent conveyances because the subsidiaries may not derive the benefit of this renewed financing. Yet, the company is pledging their assets to satisfy the obligations. I know that some of those entities are troubled as well. Trading Co., for example, has a lot of out-ofmoney positions. Its creditors will not be happy when they wake up one day and find that whatever assets that existed are now pledged to the parent company’s banks.
MR. SEIFE: Generally, are you getting a positive reaction from your own management and from the banks in your group to the latest proposal? How can we move this process forward? We have weathered another crisis. We are running out of time. If we don’t restructure, then you know what the company’s option will be.
MR. SMOLINSKY: Most of the banks are supportive at this point. They feel the company has a plan that is, for the most part, workable. It may need some improvement around the edges, but it’s something that we definitely are very interested in pursuing. There are a couple of banks that are still not quite sure. They want to understand a lot more about the facts. They are suspicious about my intentions as the agent bank because they know that I have loans to other affiliated entities. I’m in a synthetic lease. I’m in a couple of the other loans, and I have a true desire to get this thing restructured perhaps more than they do. Thus, there are suspicion within the bank group, but generally we are all moving positively toward a deal.
MR. SEIFE: Let’s not forget that merely resolving the bank issues is not enough. You have a looming maturity on your subdebt next year. That is $200 million that is not in the projections. Steve Cooper, it’s great that you have made so much progress with the banks. You have most of them comfortable, but you have subdebt coming due. What are you going to do about that?
MR. COOPER: In the next year, we have a financing gap. I’m convinced that the banks are not prepared to fill that hole. Therefore, we look at our alternatives for addressing the subdebt. One of the assumptions is some vultures bought into the issue at attractive prices. We will try to find out on what terms and conditions they would be prepared to exchange the 2004-coming-due debt for something with a longer maturity. We will negotiate such an exchange on terms and conditions that are acceptable to the company and acceptable to the subdebt holders, but push the maturity out beyond the senior bank facilities and before the maturation of the junior facility.
We are looking to re-layer the balance sheet in a way that further mitigates the cash calls on the company for the next year or two or three. In this case, we will propose an exchange offer with some PIK notes plus some warrants. As long as we can layer it properly and as long as they see the right yield to maturity, this might be something that these distressed investors will find attractive.
MR. SEIFE: Okay. We’re close to a bank deal, as Joe Smolinsky said, there are at least two banks that are not on board, and this type of restructuring will require the unanimous consent of the banks because you are talking about changing maturity dates and interest rates, and you cannot force that on any individual bank. Joe’s work is cut out for him. He will need unanimity to do this as an outof-court restructuring. At the same time, Steve is going to have his hands full dealing with the subdebt. He will have to get all the bondholders to agree to stretch out the debt. And realistically, you can’t get all the bondholders who hold this debt. The debt is too widely held, and you will always have some holdouts. Therefore, the company must decide what percentage of that debt it needs to be able to restructure and then deal with the consequences of having to pay off the holdouts. If that dollar number is too big, if the company can’t get enough bondholders on board, then the restructuring will not work.
That’s the current dynamic. We have a deal with which at least the agent bank is comfortable. We have a deal with which the majority of the subdebt is comfortable. We don’t have unanimity, and we still have our work cut out for us.
Speeding the Process
MR. SEIFE: Steve Cooper, how do you expedite the process? The longer it goes out, the more expensive it is, the more damage there is to the business, the more collateral your trading partners are going to see. Other than hiring expert professionals, what do you do?
MR. COOPER: You have three discreet problems. On the company side, you almost always have to deal with denial. That takes time. We have a phrase inside our organization called the “Triumph of hope over experience.” It’s particularly prevalent in retail. “The weather was too good; the weather was too bad. ”There are only four retail days a year when the weather is just right for retail sales. Inside the company, there is a denial factor. It exhibits itself in two ways. One is there is little or no recognition of all the things that could go wrong. The company has an upside focus. When someone must take steps to analyze the downside and preserve options, people really resist it.
The other discrete problem that takes time to work through is that the bank groups today are less homogenous than in the past. If you look at a typical syndicate today, it has domestic banks, foreign banks, asset-based lenders, prime funds, hedge funds, on and on and on. Each of those players has a different agenda.
Problem number three is public debt. If you read your typical indenture, there are no governance mechanisms in public debt. And public debt almost always requires unanimity to make changes in terms. This is impossible, particularly on widely-distributed issues.
Thus, you have three distinct factors that work against collapsing the timeframe. When it is just a balance sheet reorganization as opposed to both operations and the balance sheet, all of these disparate interest groups would be much, much, much, much better off doing it out of court. But because of either denial, the lack of a homogeneous bank group, or lack of a governance mechanism in public debt, it is very, very difficult to get all three of those planets aligned in such a way that they act in their best interests. It is just remarkable that it ever occurs.
MR. SMOLINSKY: The only thing I would add is we have a situation where we have covenant default or potential covenant default under the bank facility. We will have a payment default shortly. What will happen once we have a payment default is that it will cause a cross default of the bonds and give the bondholders — especially the 2010 bondholders who currently cannot do anything but wait — a seat at the table and may ultimately cause the house of cards to crumble.
That may provide some impetus for the bank group to move more quickly. We will be watching those cross defaults and making sure they don’t turn this into a much larger reorganization than just at the parent level.
Bank Group Tensions
MR. SEIFE: The story to date: the company and the agent bank have come to terms as to what the restructure might look like. The banks would be agreeable to a refinancing to stretch out the term of the loan for a period of four and a half years or so. In return, the company would provide collateral to support the loan, and the pledge would be for virtually all the free assets that the company has. We covered the difficulty in getting liens on a lot of the collateral in the operating companies. There are regulatory issues. There are issues with joint venture partners. The company, though, is willing to pledge whatever is pledgeable, and that includes the stock it owns in all of the subsidiaries. The parties have come to terms on the interest rate, LIBOR plus 400 basis points, which reflects to some degree the risk inherent in the loan going forward.
However, there are problems, and the problems are there are two banks in the syndicate of 20 banks that have not agreed to the terms of the restructure. Those two banks are foreign banks that do not have big pieces of the facility. Because we are changing the terms, the tenor and the interest rate on the loan, it requires unanimity. In order to do this consensually, each and every lender has to agree to it. And Joe Smolinsky has not yet been able to deliver all 20 banks.
At the same time, there is the problem with the subdebt. It matures in 2004, and Steve Cooper has been negotiating vigorously with the subdebt holders, and he has on board of the $200 million the major holders that represent $160 million of the issue. The remaining $40 million in bonds are held by small holders and by venture funds that don’t want to play ball, that want to use their leverage, and they are hoping that the exchange offer will go forward without them, and the company will be forced to pay them in full at maturity as holdouts. They are looking for huge returns having bought the debt at a significant discount. That is the current state of affairs. The company is still faced with trying to do this as a voluntary out-of-court restructure. Steve Cooper has mentioned how that is certainly the preferable path in terms of impact on the company and expense. But an alternative remains, and that is a chapter 11 bankruptcy filing. Under chapter 11, there are various options available. Joe, you are faced with the two holdouts. You know the problems that the company is having with its bondholders. What’s your next step? How do you move the process along?
MR. SMOLINSKY: I am not going to give up. I recognize that this is important to my bank, and I’m going to use every effort I can to convince the holdout banks to sign onto the deal. I also know that if a chapter 11 petition is filed, the company will need good financing. I do not want another bank to come in and take a secured position. So, I will probably want to participate in the debtor-in-possession, or “DIP,” financing which will be a much more protected loan because it will be fully secured. The banks that are holdouts may not participate in the DIP loan and that may create further relationship issues among the various banks in the syndicate.
Looking ahead at a bankruptcy, we have two options. We can try to get this deal done as we negotiated it. Hopefully the company can bring along enough of the bondholders to do a prepackaged plan of reorganization at the parent level, which would leave the remaining companies unaffected except for the various pledges that will result from the refinancing of the bank facility.
The only alternative is a freefall chapter 11. That is a horrible resolution for my clients as unsecured creditors. If we were secured, it would be a very different situation. We would be able to control the flow and tenor of the chapter 11 and be a formidable constituency with which to deal. But as an unsecured claim heading into a freefall chapter 11, I am not going to be paid interest post filing because the automatic stay will accelerate my financing. I will have a $1.5 billion unsecured claim against the estate.
MR. SEIFE: Under what circumstances would you be entitled interest in a chapter 11 proceeding?
MR. SMOLINSKY: The only time the banks will receive interest on their claim is if they are secured and have sufficient collateral to satisfy not only their principal but also accrued interest and fees and expenses and the like. A general unsecured claim would not receive interest during the chapter 11 case.
Also, in a freefall chapter 11, presumably there would be cross defaults that would require the subsidiaries to file as well. Unliquidated claims all across the corporation would accelerate. The litigation claims that may not otherwise ripen into a judgment for the next several years would now hold large unliquidated claims against the estate. We have forward contracts and other derivatives that are not stayed by the bankruptcy filing, with the result that the counterparties to those contracts could set off and terminate the positions. Given the spike in natural gas prices, some of those gas contracts may be further out of the money than we anticipated earlier, which would, again, lead to large, unsecured claims that would water down our claim in a freefall chapter 11.
We would have no further covenants because of the acceleration, so there would be nothing to call a default on, and we would be constantly worrying about the assets being pledged to a third party during a chapter 11 case.
Lastly, because of the nature of the chapter 11 process, there would be certain claims that would be elevated to the status of a priority higher than our claims. For example, you would have the administrative expense claims of running the estate. You would have professional fees, employee retention programs, payments of prepetition claims to persons who are considered critical vendors. My bank group will end up a small fish in a big pond if the group is not careful. In a prepackaged bankruptcy, we could still get this deal done without ever affecting the subsidiary entities or accelerating those liabilities.
Dealing With Holdouts
MR. SEIFE: Before we jump ahead to a prepackaged bankruptcy, note that both from the banks’ perspective and the company’s perspective, there are significant inducements to stay away from a traditional chapter 11 filing. Joe Smolinsky just outlined from the banks’ perspective some of the reasons they would try to stay away. It would create a nonperforming loan on their books, they will have to create reserves, and that will affect the profitability of the banks. They will also not receive current interest. Steve Cooper, what about from the company’s perspective? Is a traditional chapter 11 a bad thing? What’s the impact on operations? What’s going through your mind?
MR. COOPER: In my mind, the decision turns on what the company will be left with. When you do a prepackaged bankruptcy filing, essentially what you are doing is dealing with one limited strip of your capital structure. Everybody else stays in place. In this particular instance, you put the bank deal in place and you take a little out of the bondholders. Everybody else stays in place. So, when you assess whether to do a prepackaged bankruptcy filing, you have to ask as management or the board,“Do I want to end up with this capital structure? Am I convinced that I have all of my business problems behind me? Am I convinced that other mistakes that I could mitigate or rectify in a freefall chapter 11 I don’t need to mitigate or rectify?”
Thus, the decision turns on how deeply you want to go in correcting your balance sheet or your operations. The main benefit of a prepackaged bankruptcy is it takes a lot less time and money. Parenthetically, it can take a while to put all of the components in place so that you are prepared to do a prepackaged filing.
Another benefit of a prepackaged bankruptcy — compared to the more traditional bankruptcy filing — is a lot less laundry gets washed in public because you have cut the deal in advance. Everybody else is unimpaired and, so, as a practical matter, they have nothing to say about it. Let’s see.
MR. SEIFE: Let’s talk mechanically about what we are doing. In a prepackaged bankruptcy, the company files a petition in bankruptcy under chapter 11 of the federal bankruptcy code. The difference between a prepackaged bankruptcy and a traditional bankruptcy filing is that you have all your ducks in an order before you file your petition. What does that mean? It means you have your plan of reorganization prepared. You have a disclosure statement prepared that gives creditors adequate information to assess whether the plan makes sense, and you have a vote by the creditors that are affected by the plan before you file for bankruptcy.
In this case, whose rights are being affected? Two groups — the bank group and the subdebt, or the bondholders. And to speed the prepackaged bankruptcy, we will leave alone the rights of all the other creditors. We will not reject contracts. We will not try to restructure debt due in 2010. We will not affect debt at the project levels, at the subsidiary levels. The fact that we are dealing with two discrete classes of debt makes the process more manageable. The company and the banks have already fully negotiated the terms of a longterm restructure of the debt. Their agreement is attached to the back of a plan of reorganization. The restructure with the bondholders that was negotiated but has only been agreed to by $160 million of the $200 million will be part of the prepackaged bankruptcy filing as well.
The company sends the disclosure statement and the plan to all the voting creditors in these two classes. The ballots come back. In order to get the plan approved by the bankruptcy court, you will need support from creditors holding two-thirds of the affected debt. You will also need 50% of the total number voting. In the instance of this bank group, we have 18 of the 20 banks on board. That’s the requisite over-50% number. And it is well in excess of two-thirds of the total bank debt that is outstanding. So we have enough votes to carry that class.
Turning to the bondholders, we have had to do a lot of running around to find out how widely held this bond issue is because it can be difficult to make sure we have 50% in number. If there are many tiny holders who don’t want to vote in favor of this, that could create a problem. However, not everyone votes, and only those who vote get counted for the determination. We know we are okay because we have signed up an agreement with holders of more than twothirds of the subdebt that they support the plan. Court approval is assured.
Why go through this process?
The reason is to impose the deal on the holdouts. Even though outside the bankruptcy the deal requires unanimity and it requires 20 of 20 banks to agree to these new terms, through the magic of the bankruptcy court, if we get the requisite majorities, we can impose the new deal on all of the banks and on all of the bondholders.
Joe Smolinsky, if we have the required votes and we file for a prepackaged bankruptcy, what can these holdout banks do? What if they really don’t like the deal? What if they don’t like being stretched out for four and a half years? What if they think the interest rate is too low? Can the two foreign banks try to torpedo this the prepackaged bankruptcy?
MR. SMOLINSKY: They certainly can. They would focus on things like feasibility — whether, looking ahead at the projections of the company over the next two, three, five years, the company can realistically pay back all of the debt at maturity. Very often in a disclosure statement, you would attach three years of projections. The maturity of these new bank facilities is four and a half years.
They may make the company demonstrate that when these facilities mature, there will be enough money or assets to refinance at that point. They may get into issues like where natural gas prices will be five years from now. Given the complexity of this business, there are a lot of arguments that could be made on feasibility.
MR. SEIFE: Steve Cooper, you referred to the cost of a traditional chapter 11 bankruptcy. Is that a significant part of your decision to steer this toward a prepackaged filing as opposed to a traditional bankruptcy? What has been your experience with the cost of running a major chapter 11?
MR. COOPER: Very expensive. I have a somewhat different view. I think a prepackaged filing makes sense when you have good grounds for believing that a limited correction in the capital structure works. Our capital markets are generally pretty efficient. When bank debt is selling at 60¢ on the dollar and subdebt is selling at 30¢ cents, that is a sign that there is no equity value in the company. More often than not, what really happens in any bankruptcy filing at the end of the day for the bondholders is they get — if not all — substantially all of the equity in the company.
In a freefall you have the opportunity to correct all of the other deficiencies, both in operations and in the balance sheet. That is what makes a freefall attractive. Thus, my view is that while the professional fees are an important consideration, they are less important than making sure that the operation and the capital structure are put back in equilibrium. Without that, you will be back in chapter 22, or in certain really wonderful circumstances, chapter 33. It just means that it wasn’t done right the first time. The mistakes that could have been corrected were not.
MR. SEIFE: How do the interests of the shareholders of your company enter into this because you are a public company? If we can get the prepackaged bankruptcy done, we will leave the equity unimpaired. The public will still own the company. Your management’s stock options will remain in place. There might be stay bonuses in conjunction with keeping senior management in place. If you go into a traditional bankruptcy, the bondholders and perhaps the banks will end up as the new owners of the company, and you are wiping out your shareholders. How do you balance those competing concerns?
MR. COOPER: I would distinguish between the equity can still trade versus the equity being unimpaired. This is just one man’s view. The reason equity is paid a higher return is equity is prepared to take bigger risks. I don’t know anyone with a perfect investment record. In the long haul, it is better to correct properly both the balance sheet and the operations, so that the long-term cash flow of the business is adequate to support the capital servicing requirements. To leave a company impaired, even if the shareholders can still trade, is equivalent to nicking a major vein. The company will slowly bleed to death. It will be crushed by the capital structure.
If you don’t bring things into equilibrium, then all a prepackaged bankruptcy does is defer the inevitable. And in deferring the inevitable, you will lose a lot more value at the end of the day for all of the economic stakeholders than if things are done right the first time.
I know that when you look at the capital markets and you are realistic with yourselves, you cannot have bank debt selling for 60¢ and subdebt selling for 40¢ and junior subdebt selling for 20¢ and believe that there is still substantial equity value in a company. It defies gravity.
MR. SEIFE: Joe Smolinsky, what about from the bank perspective? Are you getting pressure from your management to keep this out of the traditional chapter 11? Is your management pressing you to keep this as a current loan on the books with current interest payments? How does that enter into your analysis?
MR. SMOLINSKY: Certainly in this environment, yes. We have probably already taken substantial hits over the course of the last couple of years, and the last thing we need is another nonperforming loan on the balance sheet with a reserve. In five years, I’ll consider foreclosing if the company does not create larger rates of return on its assets. And I will be happy for the next five years if I can keep a performing loan on my balance sheet.
MR. SEIFE: There is something else that happens in a traditional chapter 11 that might be costly to the banks. Are there other payments — besides professional fees — that are going to be paid ahead of the banks as unsecured creditors? Isn’t there a further subordination that occurs in a traditional chapter 11 proceeding.
For example, who are payment vendors? Why are payments to prepetition creditors permitted in a chapter 11 while the banks have to sit tight and wait until the end of the process before they will receive any payment?
MR. SMOLINSKY: A company heading into a chapter 11 proceeding always identifies several categories of creditors who must be paid. These are creditors whom the company feels strongly it must pay in order to keep operating. They provide critical and necessary goods and services. The company will tell its attorneys before filing,“We have to find a way of getting those creditors paid.”
The banks’ attorney will often negotiate with the debtor about how critical those are because we all know as practitioners that the company post-filing always gets the credit that it fears will be unavailable, and it is always able to preserve key relationships that it fears it will be unable to preserve.
Ultimately, the bankruptcy court in most jurisdictions recognizes a doctrine called the “necessity of payment doctrine” that allows the court, in the interest of the reorganization, to order that certain creditors can be paid post petition on account of their prepetition claims.
MR. SEIFE: Okay. You have identified a number of payments in a traditional chapter 11 case that will be made before the banks see a dime. We have retention payments to employees. We have payments to critical vendors. We have professional fees to see the company through the process. What about contracts that the company has, valuable contracts that it may want to preserve through the chapter 11 process? Are there any payments there that are going to prime the banks as well? How does the whole contract process work in chapter 11?
MR. SMOLINSKY: Contracts that continue to have performance obligations on both sides are known in the bankruptcy world as executory contracts. The contracts have to be assumed or rejected. If the contracts are assumed, then all prepetition defaults plus any postpetition defaults would be cured and the company would continue to be obligated after the assumption for the remaining term. It could also assume the contract and assign it to a third party.
The alternative is rejection where it would pay just the amount during the case to which the company benefited from the contract, and then the remainder would be a prepetition unsecured claim. These would have the same priority as our unsecured bank claims and could, in fact, swamp our prepetition claim once again. If a bank is secured, then it would be subordinate to that bank’s interests.
The timing for assumption is important to lenders because, obviously, if the contracts are cured during the chapter 11 case, then the prepetition claims get satisfied before the lender gets anything on its claims. Under the new bankruptcy legislation, a debtor will have to decide within 120 days whether to assume or reject nonresidential real estate leases. Normally, a debtor and the lenders would want the decision on assumption or rejection to take place at the end of the process. That way, the creditors know that when those prepetition claims are being satisfied that a restructuring deal is in place.
MR. SEIFE: This is legislation that has been sitting in Congress for several years. Who knows whether this will be the year that it finally gets passed.
So, Joe, you have an acceptable deal for your bank group. You have a few banks that don’t like it. You can get the bondholders locked up or you can do a total remake of the company by taking advantage of chapter 11. The banks might well end up owning the company. Where do you come out? And then I’m going to ask Steve whether he has a different idea or will he follow the lead of his banks.
MR. SMOLINSKY: I have 10 more files on my desk that I need to turn to, so I will look for a fairly quick and reasonable resolution. I don’t like the idea of ending up with stock in the company. I would only do that as a last resort. As a result, I am either going to want to do a deal like this one that secures my position or potentially get other lenders, maybe hedge funds or other nontraditional lenders, to do the new financing and take me out. And I want to do whatever is done as quickly and as cheaply as possible.
MR. SEIFE: Is it realistic to hope in this market that a nontraditional lender will put up the funds to cash out the bank group?
MR. SMOLINSKY: I may be forced to take a haircut, but some of the members of my bank group may want that. I know that this is going to be a very long freefall bankruptcy, and that will be a consideration for me. If I am unsecured, that means years of not getting any interest and having to monitor it and expend manpower and other resources. Therefore, I may very well consider taking a haircut to get paid now if I can get comfortable with things like preference issues and other potential liabilities for getting paid now rather than later.
MR. SEIFE: Steve Cooper, your lawyers have checked your directors and officers insurance, and it doesn’t begin to cover the bank debt. Despite what Joe just told us in private, your board heard a speech from your bankers that they have a fiduciary duty to protect the interests of creditors. You have an independent obligation to all your creditors, not just the banks. MR. COOPER: I’ll tell you a funny story. I was in a creditors meeting, and a banker looked at me and said,“You know, your job is to keep us happy.” And I said,“No. My job is to maximize values. Happiness is your problem.” He’s still not speaking to me. (Audience laughter.)
I don’t think there is an obligation in a distressed situation to keep banks either happy or whole. The obligation of the board and management is to maximize the value of the estate for all of the economic stake holders, to deliver that value to those stake holders as expeditiously as possible, and within the context of effective and efficient economic models to preserve jobs.
So, my view would be: When you look at the debt structure, you look at the fact that there are trading operations falling apart, and you look at the fact that they have substantial, unliquidated claims that haven’t even begun to hit the balance sheet. I believe, in this particular instance, the board and management should go the freefall route. That would be my view.
MR. SEIFE: That’s not how we scripted it, Steve. (Audience laughter.)
MR. COOPER: Well, I understand, but I didn’t get all the assumptions until a half hour before. (Audience laughter.)
MR. SEIFE: I think we all understand that unless the market improves and the company is able to sell substantial assets, it is not going to be able to refinance the bank debt in four and a half years or pay off the bond debt that, under the restructuring plan, would come due shortly thereafter. We had hoped that if we put this restructure in place and bought four and a half years, the company would have access to the capital markets, and be able perhaps to raise some equity or public debt in order to pay down the bank debt. A lot of people in this industry think we’re at the bottom right now and it can only get better. Obviously, Steve Cooper took a more sober view given the assumptions with which we saddled our hypothetical company. He saw the problems of this particular company as much more serious than we thought, and he opted for the traditional bankruptcy.