Winn-Dixie Emerges From Chapter 11 Bankruptcy Protection
Nearly two years after filing Chapter 11 bankruptcy, national grocery chain Winn-Dixie announced that it is exiting bankruptcy protection. Winn-Dixie’s reorganization plan had been approved by creditors and U.S. Bankruptcy judge Jerry Funk on November 9. The company now has $725 million in exit financing from Wachovia. Winn-Dixie says it will issue 54.5 million shares of new stock to unsecured creditors within the next 45 days. Any preplan common stock has been cancelled. Winn-Dixie has 522 stores in five states and about 55,000 employees.
According to Bank of America Business Capital, 85% of Chapter 11 bankruptcy cases never achieve the stage of the process where a reorganization plan is confirmed. Bank of America Business Capital suggests that company executives in charge of a reorganization effort take the following areas into consideration so as to ensure a successful Chapter 11 bankruptcy case.
1) Secure DIP Financing
Remain intimately involved with the negotiation of debtor-in-possession financing ("DIP Financing") or cash collateral order with the company's secured lenders. Too many times, the company files bankruptcy with no DIP financing or agreed-upon cash collateral order that results in bounced checks, missed payroll, and other crippling financial repercussions.
2) Watch Cash Closely
To ensure that your company receives the financing it needs, make sure the company is operating as close to break-even as possible. Create a realistic, achievable cash budget, rather than "best efforts" budgets. "Best efforts" budgets are regarded as goals by the company for which they expect praise for partial achievement. Unfortunately, failure to totally meet financial projections destroys a company's creditability with the secured lenders. Missed projections in a Chapter 11 filing could result in your company’s liquidation.
3) Perform Liquidation Analysis
The liquidation analysis typically analyzes the company's balance sheet for expected values in going concern, orderly wind-down and forced liquidation scenarios. The liquidation analysis is most important in previewing for ownership what will happen to equity in various scenarios. This gives management a much more accurate picture of where they stand than the typical balance sheet, because some values on the balance sheet may disappear if the company has to be sold. Such disappearing values might include intangibles, good will, product development costs and computer installation costs, to name a few. The cash budget and liquidation value of the company can help you flesh out a business plan that would be the basis for reorganization or going concern sale.
Essentially, you must find a core business, help approach breakeven as soon as possible, articulate a business plan, develop a realistic cash budget, understand and be able to articulate various liquidation scenarios, and help find appropriate DIP financing or cash collateral arrangements.
4) Determine First-Day Orders
Once these fundamental tools are developed, the company should be better able to determine what first-day and early case orders it needs and be able to articulate and gain support for these orders from the other creditors. If the company can justify and explain critical vendor support, by all means, they should seek court permission to pay critical vendors, provided they will receive favorable credit terms.
First-day orders frequently set the tone for a Chapter 11 bankruptcy filing. These orders let the court and the interested parties know whether the purpose of the case is restructuring the business, a going concern sale, or liquidation.
The support or lack thereof for the first-day orders also gives some indication of whether the bankruptcy process will result in success or failure—success defined as maximizing the value of the estate for all stakeholders and minimizing the cost to administer the bankruptcy.
5) Structure Carve-Outs Wisely
The approval of professionals—and specifically the structure of professional carve-outs in the first days of the case—is also a trendsetter. While conflicts between the parties may, on the surface, appear to be a financial issue, the repercussions go beyond the question of cash available for carve-out payments. Indeed, a cookie-cutter approach to carve-outs can turn out to be a mistake. Because roles of professionals can vary from scenario to scenario, structure of the carve-outs should take into consideration the likely sequence of events and their timing. Further, an ill-considered carve-out structure can diminish the benefits of a much-needed financial advisor.
6) Garner Stakeholder Support
Success in bankruptcy is tied to a number of factors, not the least of which is the financial condition and prospects of the debtor. However, planning and communication of the debtor's plans are keys to gaining and maintaining the support of the various parties in interest and moving the bankruptcy along quickly and efficiently. First-day orders need to be consistent with the debtor's bankruptcy goals. Further, to achieve the first-day orders needed, the debtor's goals need to be clearly and persuasively communicated.
The restructuring advisor plays an integral role in establishing the company's goals for bankruptcy and eventual exit from Chapter 11 as well as in adjusting expectations of various stakeholders. To fulfill this role, the advisor must help fashion a bankruptcy process that includes first-day orders and must garner much-needed support from among the debtor's myriad stakeholders.
Sagaria Law, P.C. handles bankruptcy-related cases in Monterey County, Alameda County, and Santa Clara County. To set up a free, no obligation consultation, call us at 1-800-941-6730 or email us. We have offices in Fremont, San Jose, and Monterey.
Winn-Dixie Stores Say They Are Emerging From Bankruptcy Protection, Reuters.com, November 21, 2006
Winn-Dixie Announces Exit From Bankruptcy, Associated Press/Whittier Daily News, November 24, 2006
Corporate Restructuring, Bank of America Business Capital
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