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In the financial crisis, a surge in bankruptcies not seen since the Great Depression put hundreds of U.S. companies in jeopardy. To the surprise of many, it wasn’t the end. Just a few years later, the shares of many once-bankrupt, now publicly traded companies are outperforming, showing there is a second act in life as long as you get debt under control.
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A longtime haunt for financiers like J. Christopher Flowers, Wilbur Ross and hedge funds, distressed investments made it to the doorstep of retail stock investors with little fanfare in the aftermath of the crisis. That’s because after the credit freeze precipitated a wave of defaults, those companies used the bankruptcy process to fix problems, re-emerging in initial public offerings or secondary share sales.
“For companies where their problem was debt, over leverage or onerous executory contracts, whether they are collective bargaining agreements for airlines and auto companies, or leases for retailers, those companies have a unique opportunity to restructure and be an attractive asset for shareholders in the marketplace,” says Cathy Herschcopf, a partner in bankruptcy and restructuring practice at Cooley.The thought is counter to Lehman Brothers emergence from the largest bankruptcy in U.S. history on Tuesday, where it is expected to pay $65 billion to debt holders in a multi-year asset liquidation that will pay the average creditor about 18 cents on the dollar. While Lehman Brothers was a watershed bankruptcy moment in the crisis, it didn’t turn out to be the model.
For instance, General Motors’ (GM) prospects are the brightest in a generation after it underwent the mother of all crisis-time bankruptcies and share sales. In a Tuesday interview with Detroit radio station WJR, Chrysler-Fiat’s chief executive Sergio Marchionne said that doing a Chrysler IPO would be pain-free for the third largest U.S. automaker.
Suffering from crippling debt and pension costs, in addition to falling sales and bloated operations, GM fell into a pre-packaged bankruptcy. After negotiating with lenders, the U.S Treasury and unions, GM re-emerged with a third of its debt load and leaner operations in a blockbuster November 2010 IPO. After a tough first year, GM’s shares are up over 20% in 2012, as the automaker capped a year that returned it to the global top spot in auto sales.
But the bankruptcies of automakers GM and Chrysler were rare cases of government led bankruptcy efforts notes Herschcopf of Cooley, in contrast to hundreds of other corporate failures across various sectors. In 2009, Moody’s counted 265 defaults among corporations it followed, the most since 1933 and far more than a 2001 bankruptcy wave.
Some bankruptcies like Lehman Brothers and Borders left little room for a future, but others, even in the financial services sector, entered pre-packaged restructurings where a debt or contract fix paved the way for a quick exit and a re-launch of shares with strong upside.
The difference is that some companies were facing big operational issues, while others were just suffering from a historic credit freeze or negotiating standstill on employee or lease contracts, for instance. “There is a difference between a company that has filed for bankruptcy because of capital markets issues, versus a company that needs operational fixes,” says Gary Holtzer, a partner in the business finance and restructuring practice at Weil, Gotshal & Manges.
Holtzer says that some sectors like real estate just needed a way to refinance debts or shed unnecessary assets, making bankruptcy a quick stop. Contrary to its name, hotel chain Extended Stay spent just a few months in bankruptcy before being sold to a group of private equity investors. General Growth Properties (GGP), a process that Holtzer was involved with, emerged from the largest ever real estate restructuring after its debts were amended and the company was split into two separate publicly traded entities, with both posting gains since their fall 2010 bankruptcy exits.
There are dozens of other companies, once far too risky as they hurtled towards bankruptcy, which have returned to the public markets without much of the baggage that put them in peril.
Recovering markets were also a tailwind for a flurry of bankrupt companies emerging in 2010 and 2011, notes Gerard Uzzi a partner in White & Case’s financial restructuring and insolvency group. “The fact that the asset values were recovering facilitated deals getting done,” says Uzzi of the quick exit of many companies to sales or IPOs.
After a pre-crisis private equity buyout wave, Uzzi also says that a there was an abundance of levered companies in need of a quick fix like a debt renegotiation. “A lot of the companies that went through bankruptcy were a result of the LBO rage and the cheap amount of money available for leverage. Then the liquidity dried up,” says Uzzi.
All told, many strong investment ideas were available for stock investors in the aftermath of the bankruptcy wave, contrary to what many expected in 2008 and 2009 as the U.S. economy seemed to be falling into an intractable abyss.
Still, even with a strong pipeline of initial public offerings, including many listings from private equity coffers, Scott Sweet of IPO Boutiques warns that due diligence is paramount. “There is a fine line between too much debt and debt that is workable,” says Sweet of successful listings compared with those that flop. For some companies, restructuring doesn’t go far enough and operational or balance sheet issues linger.
Here’s a look at five companies to watch for that are still private after finding new life after bankruptcy and another five that have returned to stock markets with a bang.
Rust-belt aluminium giant Aleris International filed for bankruptcy in February 2009 after it was unable to re-finance a crippling debt load of over $2.5 billion, the side effects of a $3.3 billion private equity buyout by Texas Pacific Group.
Suffering from falling aluminium prices, weakness in its auto and housing end markets and a credit freeze, the company entered bankruptcy, only to exit just over a year later after its ownership was assumed by private equity creditors Oaktree Capital Management,Apollo Management and Sankaty Advisors, who provided bankruptcy financing, called debtor-in-possession financing. The new owners agreed to provide $690 million in investment to Aleris, while wiping most of the company's pre-bankruptcy debt load.
Now those investors are set to sell shares of Aleris on public stock markets under the ticker ARS, after filing for a $100 million initial public offering in April 2011. However, the company has yet to price an offering, making it a rare company emerging from bankruptcy with a pending listing.
Aleris earned revenue of $4.8 billion and adjusted earnings before interest, taxes, depreciation and amortization of $332 million in 2011, a boost in earnings from 2010, when the company earned $4.1 billion in revenue and $264 million in EBITDA.
In October 2011, ratings agency Standard & Poor's maintained a 'stable' outlook on its B+ rating after the company announced that it would pay a special $100 million dividend to investors using cash on the company's balance sheet. The firm notes strength in Aleris' European business and the potential for a recovery in its end markets.
S&P also points out that significant risks remain for Aleris, even after the company purged debt from its balance sheet, which now stands at roughly 2.5x EDBITDA. The company still operates in a 'very competitive' and 'highly cyclical' market, while it still maintains an aggressive financial risk profile.
'Still, in our view, the company benefits from improving industry fundamentals and, after giving effect to the proposed financial transaction, manageable debt levels and adequate liquidity to meet its near-term obligations,' notes S&P. As of Dec. 31, 2011, the company had $500 million in newly issues notes and an additional $100 million in other debt, balanced by liquidity of a $390 million revolving credit facility and $231 million of cash.
Watch for the company's private equity owners to revisit an IPO filing after paying a $100 million special dividend, if commodity prices and industry fundamentals improve.
Dow Jones Industrial Average aluminium proxy Alcoa (AA) has seen its shares rise over 10% year-to-date after a 2011 swoon that nearly halved its shares and put them near post-crisis lows.
Eddie Bauer a longtime favourite for outdoor gearheads with over 8,000 employees spread between nearly North American 400 outlets filed for bankruptcy in June 2009, after a debt maturity coincided with a sharp retraction in consumer spending in its high-end retail market.
In the quarter prior to its bankruptcy, Eddie Bauer's lost $44.5 million, or $1.44 a share on a nearly 14% drop in year-over year sales. With its near half-billion dollar debt load, the recession proved insurmountable, even with cost-cutting efforts.
The company entered a pre-packaged bankruptcy and agreed to sell itself to private equity firm CCMP Capital Advisors for $202 million in a 'stalking horse bid' that's used to get a sale process going in bankruptcy courts. A month later, private equity firm Golden Gate Capital relented, paying $286 million for the retailer after outbidding retailers like Iconix Brands (ICON)
Now the questions is how Golden Gate Capital will look to exit the investment. In May 2010, the firm sold shares in popular retailer Express (EXPR), a company that it had a 75% ownership in at the time. Express shares have since rallied over 50% after a lower than expected IPO pricing.
Golden Gate hasn't disclosed any sale plans and it's been a big dealmaker in 2011, buying up Lawson Software for $2 billion and California Pizza Kitchen for $470 million, while it also recently closed a $3.5 billion fund, according to New York Times reports.
After a recession-time bankruptcy filing, TI Automotive, the worlds largest supplier of fuel storage and delivery systems re-emerged with a slimmer operations and cost structure that now is drawing reports of either an initial public offering or outright sale.
In an 18-month restructuring under British law, the company cut 55% of its salaried workers, while it also reworked over 90% of its debt in a debt-for equity swap that put ownership of the Auburn Hills, MI.- based company in the hands of a consortium of hedge funds, including Oaktree Capital Management and Duquesne Capital Management.
However in September, Reuters reported that the company was looking to sell itself to a private equity titan like the Carlyle Group or Bain Capital, among a host of prospective buyers. While reports indicated a final sale would be reached by October, no announcement materialised after private equity firms were unable to secure the financing to make a bid.
According to Reuters, the company estimated annual earnings before interest, tax, depreciation and amortization (EBITDA) of roughly $250 million and its enterprise value is seen in the range of $1.4 billion to $1.6 billion.
To be seen is whether an industry wide boom for auto manufacturers and their parts suppliers either boosts the value of TI Automotive or leads the company back in the direction of a share sale, after a second half market slump.
With other once bankrupt parts suppliers like Delphi Automotive, Lear and manufacturers like GM posting strong earnings, TI Automotive may be a similar type of investment. Concerns include the company's exposure to European markets like Britain and the cyclical nature of the auto industry.
TI Automotive has roughly 16,500 employees in 28 countries according to its Web site. It's history traces back to 1919 in Birmingham, England - thought its global headquarters are in a Detroit suburb.
BI-LO Supermarkets, a regional supermarket chain in the southeast, is making aggressive industry plays after it emerged from a 2010 bankruptcy.
The Greenville, S.C.-based company founded in 1961 is owned by private equity fund Lone Star, which bought the chain and Bruno's Supermarkets in 2005. After emerging from a 13-month bankruptcy in 2010, the company is not on the acquisition hunt.
In December, the BI-LO bought Winn-Dixie Stores (WINN) for $560 million, or $9.50 a share, a 75% premium.
With Winn Dixie, BI-LO's merged supermarket business will contain 690 stores in the southeast, which employ over 63,000 workers.
While other privately-owned supermarket chains like Food Lion have previously been reported to be interested in buying BI-LO, the company and its private owners seem to be acquirers. But that may set up for a future sale or share offering. In January, the firm filed for an IPO of its Del Frisco's investment, in an effort to raise $100 million.
Meanwhile, BI-LO is growing opportunistically in states like North Carolina, South Carolina, Georgia and Tennessee as part of a multi-year bankruptcy plan. It's competitors include Safeway( SWY), Supervalu (SVU) and Kroger (KRO), among other regional supermarket powerhouses.
Currently, the deal is one of the most ambitious acquisition attempts within the foods space in 2011. According to Bloomberg data, buying Winn Dixie was the third biggest merger in the foods space in the last twelve months. With the company, BI-LO will add 480 retail grocery locations, including approximately 380 in-store pharmacies, in gulf states like Florida, Alabama, Louisiana, Georgia and Mississippi.
For more on Winn Dixie, see 6 stocks that will benefit from reverse migration.
Delphi Automotive Group (DLPH) re-emerged in 2009 from bankruptcy in a sale to hedge fund creditors Elliott Management and Silver Point Capital after spending roughly 4 years in legal wrangling over its operations. General Motors, which spent $12.5 billion to support Delphi in its reorganization, took over some of the company's plants in the rust belt.
In the bankruptcy process, creditors agreed to wipe roughly $3.4 billion of debt from Delphi's balance sheet and invest $900 million in the maker of vehicle electronics, power trains and safety systems.
Formerly a unit of General Motors, Delphi was spun to an independent concern in 1999 with over 50,000 workers. After emerging from bankruptcy, the company's headcount has slimmed to roughly 14,000.
In 2011, as the company geared up for an IPO, it bought out General Motors' stake. Meanwhile, hedge fund Paulson & Co. became the company's largest shareholder. In a near $580 million share offering, Paulson was the largest share seller, divesting 20.6 million of the 24 million shares sold, which priced at $22.
Since the November share offering, Delphi shares have soared over 40% to $29.98, outperforming once-bankrupt parts-supplier competitors like Visteon (VC) and Lear (LEA), in addition to auto manufacturers like General Motors and Ford.
In fourth quarter earnings, the company saw a year-over-year sales rise of nearly 10% to $3.9 billion and a more than tripling of profits to $290 million. Those numbers helped the company post better-than 12% sales growth and a near doubling in profit for 2011. Nevertheless, the company's debt increased nearly tenfold.
Sterne Agee analyst Michael Ward noted that in Delphi's first earnings as a public company, the numbers beat expectations. 'All told, 2011 was a successful year for the company and we expect the momentum to continue in 2012,' wrote Ward in a Feb. 8 note, where he raised his price target on Delphi shares to $32 from $29, but left a 'neutral' rating on shares.
Delphi Automotive shares are expected to rise to $32.18, according to consensus analyst estimates polled by Bloomberg on rising sales and profitability. The company is expected to earn a $1.2 billion profit on $16.5 billion in revenue in 2012 and see those figures grow to $1.3 billion and $17.9 billion respectively in 2013. Currently, 12 analysts rate Delphi shares a 'buy,' while 2 give the company a 'hold' rating.
For more on Delphi shares, see 6 stocks purchased by billionaire David Tepper
After weathering the worst of the credit crisis, CIT Group (CIT) a commercial lender to small and midsized businesses with a 101 year history filed for bankruptcy after negotiations on a debt-for-equity exchange with its creditors failed. For stock investors, which included the U.S. Treasury after a $2.3 billion bailout investment, the bankruptcy meant a wipe out of shares. With $71 billion in assets and $64.9 billion in debt, the bankruptcy was the fifth largest corporate bankruptcy at the time.
However, the lender entered a pre-packaged bankruptcy in agreement with its lenders, in a move to try and stabilise any flight from its capital markets business as it renegotiated roughly $10 billion in debt.
'Disruptions in the credit markets coupled with the global economic deterioration that began in 2007, and downgrades in the company's credit ratings' hindered the company's ability to finance its operations, the company said in a regulatory filing.
Nevertheless, CIT was quickly able to re-emerge from bankruptcy with a more manageable debt. Only a month after its bankruptcy filing, CIT won approval to exit bankruptcy having reduced its debt by $10.5 billion to $55 billion and extending other liabilities by three years, improving the company's liquidity.
In exchange for their claims, unsecured CIT creditors were given a 70 cent on the dollar repayment and new equity in the lender. Shareholders, including the U.S. Treasury were wiped out.
In its market debut, the company's shares surged as much as 10% to $29.64. Since then the company's stock has gained nearly a third, on an improving outlook for its business. Meanwhile, bank competitors like Bank of America (BAC) and Citigroup (C), and financing competitor GE Capital have seen a weaker stock performance.
In February, the company and its chief executive John Thain, the former Goldman Sachs executive and Merrill Lynch head, decided to buy back $4 billion in debt needed during its bankruptcy exit, in a push to gain investment grade credit ratings.
'This is a significant milestone for CIT,' said Thain in the statement, noting an improved financial flexibility. At the time, the company's credit ratings were B2 with a 'stable' outlook from Moody's and B+ with a 'positive' outlook from S&P.
After the debt deal, Guggenheim Partners analyst Jeff Davis noted that the move will lower CIT's cost of capital, but a change to 'fresh start' accounting treatment may depress its GAAP earnings. As CIT's ratings improve, Davis says that the company may return to the bond markets to refinance $9 billion of upcoming debt maturities. For now, he notes that investors should focus on the company's pre-tax earnings and its $4 billion in unused net operating loss provisions, which could boost earnings.
'We believe investors are better served by focusing on pre-tax, pre-FSA earnings given the FSA issue and ~$4 billion of NOLs that have yet to be materially utilized,' wrote Davis in a Feb. 13 note. He rates CIT shares 'neutral' with a $39 a share price target.
CIT Group is expected see its profitability increase dramatically in 2012 and 2013, according to consensus analyst estimates compiled by Bloomberg. The lender is expected to earn $225 million in profit on revenue of $1.75 billion in 2012 and benefit from sales above $2 billion in 2013, which will more than double profits to over $600 million.
Analysts polled by Bloomberg give CIT Group shares a $44 a share price target, with 11 'buy' recommendations to go with 7 'holds' and 1 'sell.'
Semgroup (SEMG), one of the less likely victims of the credit crisis has emerged from a 2008 bankruptcy, posting strong stock gains that are fuelled by takeover speculation and an energy sector rally.
In July 2008, the energy trader and pipeline transporter went bankrupt after it incurred a $3.2 billion trading loss on futures contracts tied to the then rising energy market. When lenders found out about the loss, they pulled credit facilities that were key for the company's trading accounts, precipitating a bankruptcy.
Last year, the company's chief executive Thomas Kivisto settled a complaint with the Securities and Exchange Commission on the firms disclosure during its waning days, paying a $1.3 million fine without admitting any wrongdoing.
After entering bankruptcy and shuttering its trading unit, SemGroup received multiple takeover offers from competitor pipeline player Plains All American Pipeline (PAA).
The first hostile takeover bid for SemGroup came from Plains in March 2010 at a value of $17 a share. At that time, SemGroup was intent on using an initial public offering to continue its post-bankruptcy recovery and its board rejected Plains' offer. The company instead went public in November 2010, pricing shares at over $24 on the first day of trading.
In 2011, Plains continued its hostile efforts for SemGroup in a series of takeover attempts rebuffed as 'opportunistic' and 'undervalued.'
In November, SemGroup rejected a $24 a share hostile bid by Plains, rebuffing an over $1 billion bid. Instead, the company has focused on asset spins as a way to raise capital and boost the value of its shares.
In August, SemGroup announced it would raise $181 million by doing a public offering of Rose Rock Midstream (RRMS), which it IPO'ed a 41% stake of in December at $19 a share, raising $140 million. SemGroup also announced a sale of its SemStream businesses to NGL Energy (NGL) for $279 million in cash in November 2011.
SemGroup has followed its post-bankruptcy planning on its own terms - but to be seen is whether spins and continued obstinacy to a takeover will curtail Plains from making a bid that SemGroup or its shareholders can't refuse.
Since its November 2010 IPO, SemGroup shares have rallied nearly 14% to $28.40, bolstered by a near 10% year-to-date gain.
However, after a series of spins, SemGroup may finally have gotten a full valuation of its businesses, notes Deutsche Bank analyst Curt Launer in a Mar. 1 note. Based on M&A speculation and the company's expected earnings, Launer boosted his price target for SemGroup shares to $30, while maintaining a 'hold' rating.
LyondellBasell Industries (LYB) was one of the large pre-crisis mega buyouts until it filed for bankruptcy in January 2009, after weak sales and a cash shortfall made the company unable to meet a $280 million interest and debt repayment.
For the chemicals maker, the filing came just over a year after Houston-based Lyondell was sold to Basell of the Netherlands, a subsidiary of conglomerate Access Industries. The merger, based largely on debt financing, pushed the combined company's debt load to roughly $30 billion.
After a 16 months reorganization, LyondellBasell emerged from bankruptcy having reduced its debt load drastically to just over $7 billion from $24 billion when it entered. With minimized debt, the company emerged with an equity value of roughly $10 billion, bolstered by the company's trailing sales of nearly $31 billion at the time.
In April 2010, a bankruptcy judge approved its exit, with the consent for a lending arrangement by significant stakeholders Access Industries, Apollo Management and Ares Management.
Since an October 2010 IPO, LyondellBasell has surged nearly 50% to $39.28 a share on surging chemicals sales. In 2011, the company earned a record $51 billion in sales as industrial end markets recovered along with the wider economy. Nevertheless, profits in 2011 fell, even after taking into account a one-time $7.4 billion 2010 accounting benefit to the company's bottom line.
Dalhman Rose analyst Charles Nievert says that LyondellBasell may be a chemicals industry outperformer for years to come.
'While we expect commodity chemical shares to take a breather after having outperformed the broader indices since the beginning of the year, we believe LyondellBasell will continue to take advantage of lower US ethane over the coming year despite its European headwinds,' wrote Nievert in a Mar. 2 note. He rates the company's shares a 'buy,' with a price target of $53 a share.
LyondellBasell is expected see its profitability increase by roughly 25% in 2012 to $2.7 billion on $50.4 billion in sales, according to consensus analyst estimates compiled by Bloomberg, which give the company a price target of $52.31. In 2013, those analysts expect the company to see profits improve to $3.2 billion on growing sales of nearly $52 billion.
Overall, 16 analysts rate LyondellBasell shares a 'buy,' while only 1 analysts rates shares a 'hold.'
TheStreet Ratings rates LyondellBasell Industries as a 'hold.' You can view the full Ratings Report Ratings Report for LyondellBasell for more on the company's financial performance.
In June 2009, popular theme park operator Six Flags (SIX) went bankrupt, citing its 'unsustainable' $2.4 billion debt load. In its filing, the company expected to shave its debt by $1.8 billion and its preferred share liabilities by $300 million.
'This restructuring process is strictly a 'back of the house' effort to address and ensure the longstanding financial stability of Six Flags,' said Mark Shapiro, Six Flags chief executive in a statement when announcing the filing. The previous year record sales of $275 million weren't enough to offset $175 million in interest expense and $100 million in necessary capital expenditure.
In May 2010, Six Flags exited bankruptcy, shaving its debt to $1 billion from $2.7 billion as creditors such as hedge funds Stark Investments, Penwater Capital Management and Bay Harbour Management seized control of the entertainment giant with 19 amusement parks throughout North America, reflecting expanded operations from the company's initial 'six flags.' Management retained a near 15% stake. After exiting bankruptcy, the company filed for an initial public offering.
Six Flags shares have nearly tripled from its June 2010 IPO to $44.80 a share, on a more sustainable capital structure and rising sales. In 2011, the company eclipsed $1 billion in sales for the first time since the recession on a strengthening of consumer spending. Excluding one time accounting gains, the company also saw a narrowing of its net loss to $24 million, from levels as high as $229 million during the recession.
Oppenheimer analyst Ian Zaffino expects that in coming years, Six Flags will be able to leverage a healthier capital structure and a new season pass strategy to grow sales and cashflow. 'Management continues to execute on its strategy of fewer discounts and greater season pass sales and remains bullish on its long-term prospects,' wrote Zaffino in a Mar. 1 note. He rates Six Flags shares an 'outperform,' with a $50 a share price target.
Overall, Six Flags is expected to turn a $50.5 million profit on $1.1 billion in 2012 sales, according to consensus analyst estimates compiled by Bloomberg, which gives the company a price target of $60.13. Those analysts expect flattish profitability and sales growth from 2012 to 2013; however.
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