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ABCs As an Alternative to Bankruptcy for Implementing Distressed Transactions
Companies suffering financial distress frequently reach a crossroads where they need to either implement some type of transaction or will be forced to liquidate. Among the transaction vehicles that may be considered include out-of-court restructuring, an assignment for the benefit of creditors (ABC), foreclosure, Chapter 11 bankruptcy reorganization, or Chapter 7 bankruptcy liquidation. In developing a plan for moving forward, management should evaluate and determine, with appropriate input from outside experts, feasible alternatives.
Considerations include whether the business needs a balance sheet restructuring (deleveraging debt), an operational reorganization (eliminating certain locations and/or reducing or terminating parts of the business), and/or the use of a sale or merger process to clean the slate. Even if the business is no longer viable standing on its own, is it still attractive (at least in part) to a potential acquirer or joint venture partner?
There are major differences between distressed transactions and healthy deals. Speed often is an important factor motivating distressed transactions. It can be imperative to move quickly so that the business is held together. Delay may result in the loss of key employees. Negative cash flow leads to further liability risk and uncertainty. These situations are frequently viewed as the proverbial "melting ice cube."
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