Here’s my latest Chicago Law column that appeared in Tuesday’s paper:
Companies are figuring out, much like consumers, that less debt is better in good times and bad. And for the time being, creditors also are saying less is more.
The convergence of interests is playing out in corporate bankruptcies in the aftermath of the 2008 financial meltdown. Still, bankruptcy cases usually remain long and complicated, unless you’re an automaker receiving a government bailout.Take Merisant Co.
The Chicago-based maker of the artificial sweetener Equal emerged from bankruptcy Monday with 74 percent less debt than it had when it filed for Chapter 11 reorganization a year ago. Its debt decreased to $147 million from $567 million.
Like in other corporate bankruptcies, Merisant wiped out much of its debt by converting it into equity. What’s interesting is that some of the secured bank debt also was converted into equity. Secured lenders are usually wary of taking equity because if the company can’t service its debt and files again for bankruptcy, the equity becomes worthless.
In Merisant’s case, the company converted about $45 million of the company’s $205 million in bank debt, the majority of which was held by Minnesota-based Wayzata Investment Partners LLC, into convertible preferred stock. Wayzata emerged as the majority stockholder of Merisant.
The goal was to have as healthy a balance sheet as possible going forward, according to lawyers representing both the debtor and creditors.
"While the company could have emerged and serviced $200 million in debt, it’s that much better off with $150 million," said David Neier, a bankruptcy partner at Winston & Strawn who represented the official creditors committee. "If you really want to have a successful workout, you have to make sure you can service debt in a good economy and a bad economy."
James Conlan, a bankruptcy partner at Sidley Austin and lead counsel to Merisant, said: "Majority stakeholders agreed that a conservative debt load was the right approach. That’s what is happening in many big (bankruptcy) cases. It’s a different world than it was three or four years ago."
If the lawyers make it seem like Merisant’s bankruptcy case was smooth sailing, don’t be fooled.
To entice Wayzata, the company offered it a premium on its bank claim. According to court papers, Wayzata would have recovered up to $1.22 for every dollar of bank debt in Merisant’s original reorganization plan.
Some of the bondholders, who came after the holders of bank debt in terms of being paid, complained. There was no premium for a class of bondholders who were to receive up to 12.5 percent of common stock in Merisant in exchange for $235.3 million in notes.
One bondholder, Nomura Corporate Research & Asset Management Inc., stuck its head out and filed a formal objection to Merisant’s proposed reorganization plan. For its effort, Nomura and other bondholders boosted their equity stake to 22.5 percent, and Wayzata received fewer preferred shares.
"We were happy to be able to positively increase the recoveries for Nomura and other members of the noteholders class," said Robert Novick, a New York bankruptcy lawyer who represented Nomura.
With the reduced debt load, Merisant said, its annual interest expense will be cut to $11 million from $36 million. It will likely redeploy some of the savings in marketing.
Before the bankruptcy, Equal had been losing ground to Splenda, an artificial sweetener made by Johnson & Johnson. In 2008, Splenda grabbed 60 percent of the market, and Equal had 11 percent, third after Sweet & Low.The upshot: Merisant’s revenue sank 25 percent from 2003 through 2008, when it totaled $262 million.
Merisant is betting on future growth through PureVia, a zero-calorie natural sweetener derived from the leaves of the stevia shrub.
Jonathan Swift argued in A Modest Proposal that children of the poor should be eaten. He went to a rhetorical extreme in order to illustrate the absurdity of a perspective he mocked and opposed.
