sion financing is an extremely attractive
business. It’s low risk.
In the old days you used to get 200 basis points above a nonbankruptcy loan.
It’s under court supervision. So I just suggested that bankruptcy is a real problem
for the country, like in the 1930s when
we had to restructure finance corporations, the government should consider
that. Nothing ever happened.
The National Bankruptcy Conference
recently issued a proposal to amend the
Bankruptcy Code to allow small businesses to file under Chapter 12, which
is reserved for family farms and family-owned fishing businesses. NBC’s proposal
has gotten some attention on Capitol Hill.
What is your opinion of the idea?
I’m not a strong supporter of that. I
don’t know the statistical basis for it. I’m
not familiar with it. I haven’t studied it and
I wasn’t on that committee at the Conference. But small businesses can use Chapter
11 very effectively themselves. I think the
objective in using Chapter 12 is that you
can hold secured creditors at bay. I just
don’t know how useful it would be.
The other trend, which is not in connection with the law but because we have
come almost full circle in bankruptcy, one
of the objectives of the 1978 Code was to
encourage businesses to go into reorganization before all the assets were dissipated. The studies that had been done showed
that, under the old law, there was a real
reluctance to go into bankruptcy reorganization and by the time companies got
there, there was nothing left to reorganize.
So the 1978 Code was drafted and
enacted to encourage distressed companies to go into reorganization earlier while
there was still a real ability to restructure
and reorganize, and that’s why the debtor-in-possession concept was adopted. That’s
why Section 364 was put in for DIP lending.
There were, in effect, inducements to come
in. Bankruptcy was not supposed to be a
In fact, the word “bankrupt” is not used.
It was the debtor that never caught on. The
premise worked for a while. As these claw
backs came in, we went back to a situation
where there’s enormous disinclination to
use the bankruptcy process. Companies
are staying out as long as they can and
sometimes they stay out too long and
there’s nothing left to do and that’s a very
notable trend. I think part of that is the
Chapter 12 initiative, but I’m not sure it’s
going to work.
With the economy supposedly turn-
ing around, do you expect the pace of
corporate bankruptcies and reorganiza-
tions to slow down?
Well, the current trend today is on loan
agreements that were entered into during
the so-called robust economy in 2005, 6 and
7. They do not really have very demanding
requirements on the part of the borrower.
Those were known as No-COV/Low-COV
Under those agreements, basically, if
the debtor pays current interest, there’s
nothing the lender can do and, in today’s
environment, there is a large group of business people and entities who desperately
want to see a recovery so that they’re almost fantasizing about it. The game that’s
being played is sometimes referred to as
“amend and pretend.” They are amending
loan agreements to extend the maturities.
In some places it’s called “delay and pray.”
The objective there is we don’t want to
take any write-downs now. So as long as
the borrower is paying current interest,
we’ll just keep extending.
The problem is, some day there’s
going to be a moment of truth or an
hour of truth. Michael Tennenbaum, of
Tennenbaum Capital Partners, said at a
forum recently, ‘ We’re in the kick-the-can-down-the-street philosophy’ and, in
his view, the can is getting dirtier each
time it gets kicked. We’re putting off
recognition that there are large debts
out there that will have to be paid
today and that cannot be paid in the
I think there’s a story in one of the pa-
pers today, either Financial Times or one
of them, about the maturities that will
be coming up in the next three to four
years. Unless the economy really recov-
ers, I have some doubts those maturities
will be met and we are going to have a
rash of out-of-court restructurings or
we will have a rash of bankruptcy cases.
Again, it relates back to the economy.
Michele Ocejo is executive editor of The