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Paradigm Shift: Observations on the Current Bankruptcy Cycle

BY Peter S. Kaufman
November 23, 2009

The current bankruptcy cycle is unprecedented in a number of ways: The old playbook is stale and creative new strategies are the order of the day. It stems in large part from a glut of easy credit available from 2001 through early 2008. It breaks new ground due to seminal cases like Lehman, GM, and Chrysler, the presence of government bailout funding, the severity of the credit crisis, and the retrenchment of the traditional model of standalone reorganization through Chapter 11.

The Current Cycle

In the current cycle, the typical Chapter 11 stand-alone reorganization model has taken a back seat as the diminution of collateral value, increasingly complex and layered capital structures, the inability of companies to refinance debt or obtain debtor-in-possession (DIP) financing, constrained liquidity (and fewer acquirers able to access financing) are all having an impact on restructuring dynamics. These factors have given rise to increasing numbers of liquidations, pre-negotiated bankruptcies, and quick-cycle Section 363 sales.

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