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The Growing, Unseen Chapter 11 Wave

posted by Stephen Lubben

Over the weekend, Six Flags -- the owner of Magic Mountain in Los Angeles and other amusement parks -- filed a chapter 11 petition in Delaware. This morning, the Extended Stay hotel chain filed a chapter 11 petition in New York.  All of this is part of an increasing wave of large corporate chapter 11 cases that has been obscured by GM, Chrysler, and Lehman Brothers. Magic Mountain lost its appeal once I left my teens (never did get there) and I'm not sure I've ever stayed at an Extended Stay hotel, but both of these debtors have billions of dollars in assets and thousands of employees. That is, these companies have serious implications for the future of chapter 11 and the larger economy.

Roller coaster ride-1 Indeed, according to bankrutpcydata.com, already there have been thirty-five chapter 11 cases filed by debtors with assets of more than $1 billion this year. In 2008 there were not that many large cases in the entire year. Chapter 11 cases of this size can be expected to continue to develop throughout the year and into next year, as we continue to work through a "bulge" in senior debt that newly moderate lenders will refuse to refinance and a series of problems in private equity. And the "tail" of this chapter 11 boom can be expect to persist for at least a couple of years past the petition date -- that is, into 2012.

Congress will probably never hold hearings on whether these companies should be allowed to use §365, but I think we can expect that the collective, collateral effect of these cases on trade creditors, landlords, and employees will equal, if not exceed, the effects of the better-known cases. This will in turn create a ripple of small business bankruptcy cases that will be completely unseen by the financial press and most academics, including myself.

Illustration from "Editor," all rights reserved.


Actually, I think many of the cases you identify are principally "balance sheet" fixes that swap debt for equity but don't play with the operating liabilities very much. Note that the ones you mention entered chapter 11 with a plan term sheet already in hand. I think the real story of this wave is how efficient chapter 11 has become - the ratios of the dollar value of the excess liabilities being taken out of the system to the time of processing that resolution and the expense of processing that resolution are going way up.

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