Jay Alix, appointed by President Clinton as one of the first members of the newly established Bankruptcy Review Commission, has some advice for bankers: stay informed.
The veteran crisis manager and president of Jay Alix and Associates, has seen bankers make plenty of ill-informed decisions as creditors. Over the next two years, he says, it will be critical to keep up to date on the activities of the nascent commission.
"Whatever goes on here could affect the recovery process and the recovery amount," for bankers in bankruptcy proceedings, said Mr. Alix.
The commission findings could lead to legislation with important ramifications for creditors. Until then, Mr. Alix said, bankers should be aware of the opportunities that exist to strengthen their positions in a bankruptcy proceeding.
Once a borrower appears headed for the bankruptcy court, banks should try to: seize only collateral that is not vital to the business; secure additional personal guarantees; monitor financial reports; monitor collateral; and watch the business closely.
"There are a lot of self-help measures bankers can take when the debtor is coming to them looking for more financing or relief from current loan covenants," said Mr. Alix.
Some banks have gone beyond the basic preventive measures, structuring some creative and innovative defense measures.
In one case, Mr. Alix served as trustee for Cardinal Industries and had to grapple with Huntington Bancshares, which had done some impressive maneuvering.
The bank had rolled over loans, perfected positions that were unperfected, converted unsecured debt to secured debt, and transferred loans from insolvent to solvent debtors.
"The bank gave itself better leverage and much better recovery," Mr. Alix said.
Once a company goes into bankruptcy, banks have a choice between post- petition financing, such as debtor-in-possession financing, and cash collateral financing.
"All things being equal, a lender would be better off doing post- petition financing because that is treated as an administrative claim," said Mr. Alix. The administrative creditors in a bankruptcy have to be paid before a plan of reorganization can be confirmed. A lender in this situation can require a debtor to pay them off before the debtor can come out of bankruptcy.
In cash collateral financing, a debtor has greater control of the ultimate payout and schedule.
Mr. Alix said that banks often have difficulty figuring out whether to take a preference. A preference on a loan is a payment made within 90 days of a bankruptcy filing.
"I was in a situation where a small bank was given an opportunity to receive a preference, but said they couldn't take it," said Mr. Alix. There's no reason it shouldn't have, said Mr. Alix, since preferences are not illegal.
In the worst case, a civil court would force the recipient of a preference to return a payment made by a company before it filed for bankruptcy.
Three compelling reasons support taking a preference. First, the debtor may not go into bankruptcy. Second, the debtor may come back to try to recover it. And third, possession is 9/10 of the law.
"If you have a chance to receive what later might be a preference," said Mr. Alix, "take the money."
Mr. Alix, who has hosted seminars for bank loan officers, will share his insight with the bankruptcy review commission.
Mr. Alix, registered as an independent voter, will be joined on the commission by two other presidential appointees and two appointees each by the Senate, the House of Representatives and the Supreme Court.
The commission is seen not as an ad hoc group of experts that get together and talk among themselves, but as a potential policy maker.
Although it has neither a specific agenda nor a schedule of meetings, it is expected to use its $1.5 million budget to change an oft-contentious and convoluted process in which bankers across the spectrum find themselves closely involved.
Mr. Alix said the commission would be sensitive to banks' needs. "In fact, it could be a real positive thing for them. I don't think there is anything in this commission objectively and fundamentally that is a threat to banks."
Mr. Alix expects to bring banks into the review process and would welcome feedback, via fax, in the process.
