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Prepackaged bankruptcies on the rise Print E-mail
Friday, 06 November 2009

By Marine Cole

There's no doubt prepackaged bankruptcies are on the rise. CIT Group recently filed one of the largest to date. And other companies like Samsonite are also taking advantage of such arrangements.

Also known as prepacks, they allow companies to negotiate with creditors, bondholders and sometimes stockholders ahead of a bankruptcy filing. The result is fewer disruptions to business operations and less time spent under court protection. For instance, Samsonite could exit bankruptcy after just a couple of months in court; CIT within a month.

So far this year, prepacks represent 17.5 percent of all Chapter 11 bankruptcies among publicly-traded companies, according to, a Boston-based researcher. That's up from 10 percent in 2008 and 4 percent in 2007.

Prepacks have also been in favor this bankruptcy cycle because ideal candidates are companies with excessive debt -- especially secured debt -- since the process means a smaller pool of debtholders to negotiate with. The growth of the leveraged loan markets in the few years before the credit crisis took hold contributed to companies carrying huge loads of secured debt.

But there are some parties not satisfied with the process. AccountancyAge reported last month that unsecured trade creditors have been particularly vocal in their criticism due to the lack of transparency in prepacks. It cited a PricewaterhouseCoopers Turnaround Director Panel report stating that prepacks may be "morally questionable" and "unacceptable," and called for a more transparent process so trade creditors don't feel so left out.

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Marine Cole
written by Marine Cole, November 16, 2009
Bond insurer Ambac may be the next company to jump on the prepack bandwagon. It said in a filing with the Securities and Exchange Commission last week that:
"Ambac is developing strategies to address its liquidity needs; such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. No assurances can be given that Ambac will be successful in executing any or all of its strategies. If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups."

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