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Companies turn to bankruptcy again - and again

A sign points the way towards U.S. Bankruptcy Court in New York.
A sign points the way towards U.S. Bankruptcy Court in New York.

By Caroline Humer

NEW YORK (Reuters) - Bankruptcy can be just about as traumatic as it gets for a company, its employees, customers, and suppliers. The only thing worse - going through it again, and again.

The number of companies making second trips through bankruptcy -- sometimes dubbed "Chapter 22" filings, or Chapter 11 times two -- has jumped in the first two months of 2012.

Four of the 17 public companies that have filed for bankruptcy this year, including Twinkie maker Hostess Brands and family-style restaurateur Buffets, are repeat filers, according to BankruptcyData.com, which tracks filings by publicly traded companies and repeat filings for companies that were once listed on a stock exchange. That compares with six companies that slid back into bankruptcy in all of 2011.

It's not unheard of for a company to file a "Chapter 33." Late last year, clothing retailer Filene's Basement filed its third Chapter 11 in 12 years. It has now gone out of business.

Companies often go through bankruptcy as the system seems to encourage - getting out of Chapter 11 with streamlined operations and in better shape to weather economic changes.

When that does not happen, it is often because a company still has too much debt. Lenders are a big factor because they provide the financing, but the blame can also lie with the companies, investors, bankers, lawyers and judges.

"There is too much emphasis on getting out, and getting on with business rather than whether it is going to work," said Ed Altman, the Max L. Heine Professor of Finance at the Stern School of Business at New York University.

Some companies never make it out of bankruptcy, and -- like Filene's -- end up liquidating. But for those that do emerge, and then tumble into bankruptcy again, it's a failure of everyone involved, Altman says.

He said he expects more such filings as companies that have used bankruptcy only to cut debt face up to operational problems they have not solved. The cost of repeat bankruptcy includes a new round of legal fees and damaged corporate reputations.

Under the law, judges must ensure a company's reorganization plan is feasible before allowing it to exit bankruptcy. Still, companies do not always emerge in sound enough financial shape to weather an uncertain economy.

Typically, experts say, Chapter 22s increase as overall bankruptcy filings rise. However, the quick takeoff of repeat filings this year comes as the number of bankruptcies continues at the same pace as last year. The 17 total public-company filings so far in 2012 compares with 15 at this point last year.

To date this year, the number of Chapter 22 bankruptcies filed as a percentage of overall bankruptcies is running at a rate that could outpace prior year Chapter 22 filings.

The companies that have filed this year have little in common on the face of it.

Hostess Brands, Buffets Restaurants and ocean shipper TBS International filed for Chapter 11 again. Fountain Powerboats Industries - maker of the Donzi speedboat and Pro-Line and Baja fishing boats - also went back to court again.

Spokesmen for Hostess and Buffets declined to comment. Spokesmen for TBS and Fountain Powerboats did not return calls seeking comment.

PAYING AGAIN AND AGAIN

Each time a company goes bankrupt, it must pay for lawyers and advisers not only for itself, but for its major creditors. In its first bankruptcy, Hostess spent more than $170 million on professional fees, based on its monthly operating reports.

Bankruptcy the second or third time around often involves a new cast of characters. In bankruptcy, company ownership often shifts from shareholders to secured creditors, who hire a new board and may name new managers. They in turn hire their favorite lawyers and advisers, and decide which court to use.

For Buffets, a 30-year old restaurant group that runs the Old Country Buffet and Hometown Buffet chains, its second bankruptcy is a return trip to the same judge in Delaware it got to know the first time around.

Buffets first filed for bankruptcy in January 2008, blaming weak consumer spending, foreclosures, and high food and energy costs for cutting its cash. It sold restaurants and cut its debt by more than half to about $250 million.

The company emerged from bankruptcy in April 2009 despite lingering problems as bank lenders demanded expensive new debt and restaurant leases were difficult to negotiate. That collided, post bankruptcy, with weak consumer demand and higher food prices, according to Saul Burian, a managing director at Houlihan Lokey who advised Buffets on its first bankruptcy.

Only a year after exiting bankruptcy, Buffets hired a different adviser and was considering a sale. But no buyer was announced and Buffets filed for bankruptcy again in January. This time, the company plans to tackle the leases, according to the restaurant group's reorganization plan filed in court.

Hostess faced some similar problems. The company filed for its first bankruptcy in 2004, citing declining sales, high food costs, excess capacity and worker benefit expenses. It tackled some issues - closing bakeries and simplifying some union contracts -- but it did not deal with its debt. It went into the first bankruptcy with $648.5 million in debt, and came out with more than $800 million, according to court documents.

As a result, the company's second bankruptcy-- after less than three years under the control of private equity firm Ripplewood Holdings -- came as no surprise to some workers.

One union, the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, accused the company of having "frittered away" union concessions, wasting money on a corporate headquarters move, according to court papers. Hostess Chief Executive Brian Driscoll, though, has blamed legacy worker costs, uncompetitive collective bargaining agreements and debt.

The company's new plan is to eliminate these "crippling" payments and distribution costs it did not tackle the first time, Driscoll wrote in papers filed in U.S. Bankruptcy Court in Manhattan. The previous bankruptcy was in Missouri.

Heavy debt loads are a common problem for companies whose bankruptcies fail, Altman said. Companies often use debt from their secured creditors to keep going after bankruptcy, and the higher the fees on that debt, the more the creditors earn.

High debt loads mean a better chance of defaulting again, Altman said, while companies with less debt and more equity do better after bankruptcy.

"The culprit is the players in the system who have maybe a too short-term horizon," he said.

(Reporting By Caroline Humer; Editing by Martha Graybow,; Phil Berlowitz)

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