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October 02, 2007

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RPD

One issue regarding Prof. Lo Pucki's earlier post is that the post suggests that EBITDA is being used as a proxy for earnings. I would think this is incorrect, at least from a CorpFin perspective. EBITDA is a proxy for cashlow--not earnings--since EBITDA is, by definition, available to both debt and equity.

George Marcus

I am a U of C law grauduate (1973) practicing corporate reorganization law in Portland, Maine, concededly far from the epicenter of Chapter 11 cases for publicly held companies. Nevertheless, from my experience and observation, it seems that Prof. Baird is clearly correct in observing that the companies that seek Chapter 11 relief in order to accomplish a 363 sale are, relatively speaking, the "dogs". Prof. LoPucki apparently did not pick this observation up because I believe that his data is insufficiently refined to have permitted this conclusion. Nevertheless, the 363 sale route is generally chosen by the "dogs" because these Chapter 11 debtors do not have the financing to remain in business, or it does not make economic sense for them to remain in business, and/or the acquirors do not want to incur the transaction costs associated with going through a conventional Chapter 11 plan confirmation process,e.g disclosure statement, voting, etc. After all, why should they, as it is hard to articulate any value to an acquiror in doing so when the faster and cheaper 363 route is readily available--as Prof. LoPucki points out. Moreover, the faster a sale happens, the less likely it is that the debtor will find other suitors. In this regard, I find implausible the notion that the use of Sec. 363 is founded to any significant degree on the improper influence of "case placers". Section 363 is used because acquirors--and their targets--consider it vastly more efficient and risk free--which raises a number of other interesting issues concerning the Chapter 11 process, such as this: if the 363 process is so efficient for the dogs, why wouldn't it work with other debtors, and if it does, what is the utlilty of the rest of Chapter 11's provisions regarding plans, etc. I am very interested in following the discussion between Professors Baird and LoPucki and would be interested in a discussion of this particular issue.

George Marcus

I already found one error in my post. I am a 1976, not 1973, U of C law graduate. I apolgize to members of the class of 1973.

Lynn M. LoPucki

George Marcus refers to the 363 route as “faster and cheaper” than reorganization. But in our studies of professional fees, using several different definitions of sale, Joe Doherty and I repeatedly found no statistically significant difference between professional fees and expenses in sale and reorganization cases.

Section 363 sales are faster if you compare the time from filing to sale in sale cases with the time from filing to confirmation in reorganization cases. But if you compare time from filing to confirmation in both kinds of cases, the sales we studied took considerably longer than the reorganizations. Secured creditors were often paid from the sale proceeds at the closings. But the estates usually kept the unsecured creditors’ money – and even some of the secured creditors’ money – until months after confirmation. The professionals kept billing against it. (We don’t know what the fees were for.) So I would not agree that the 363 sale of large public companies is faster and cheaper than their reorganization.

That the sold companies are “dogs” is certainly the conventional wisdom. But what is about them that makes them dogs? We controlled for earnings (EBITDA, EBIT, and Net Income) and industry. The sales still brought lower recoveries than the reorganizations. Can anyone suggest some other, measurable variable (other than sale price of course) that would provide an objective basis for saying that the sold companies were worse than the reorganizations?

Lastly, if sales are more efficient than reorganizations and sales don’t bring lower prices for the same companies, why is it that most companies filing Chapter 11 continue to reorganize rather than sell?

Dan McGuire

It is difficult to think of a measurable variable. Adding to the list of difficult to measure variables, many cases end up as 363 sales after about a year in chapter 11 because a the constituents cannot agree on terms of a stand alone plan. Thus many companies that are not deemed worth reorganizing end up going the 363 route. Subjective and hard to measure, but true.

Dan Feldman

Doug:

Tell me why Bangor Punta shouldn't limit the rights of buyes of distressed bonds, just as it does the rights of buyers of distressed stock. Vultures like the Tribune Co bond holders make their living stressing the lives of lawyers (who advised on solvency) just for the fun of showing how tough they are; Fun is not bankruptcy's purpose

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