10 Once-Bankrupt Companies That Are Primed For A Comeback


General MotorsThis post originally appeared at The Street. 

You thought these companies were dead. Now they're ready to come back to life and maybe even thrive.

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 WJRChrysler-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

10. Aleris International

10 Aleris International

Rust-belt aluminum 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 aluminum 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 aluminum 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.

For more on Alcoa and cyclical investments, see 10 stocks JPMorgan says may rise up to 58% and 10 stocks in the red hot materials sector

9. Ally Bank

9 Ally Bank

Once the auto-finance arm of General Motors (GM), Ally Bank received multiple bailouts during the financial crisis totaling $17 billion, which represented a big chunk of the auto industry bailout.

Still 73.8% owned by the U.S Treasury Department, Ally Bank filed papers for an initial public offering in March 2011, which Detroit News said could be in the $6 billion range. However, problems at the company's insurance unit called ResCap have made an initial public offering look less likely, according to February reports from Reuters that indicate the company is now considering an outright sale.

Analyst estimates of the value of Ally Bank provide valuable insight for investors, should the Treasury decide to go ahead with a share sale. A $6 billion share issue would also be one of the largest IPOs, potentially larger than the much hyped Facebook listing.

The company is split into three units that have synergies. Ally Bank provides stable funding for an auto-lending unit, while its insurance arm goes nicely with the finance business as an added in-dealership product. However, a government breakup may split the units into separate sales, according to Reuters reports and a KBW analysis.

Ally Bank could see strategic interest from lenders like CIT Group, who would find the banks roughly $1 billion in deposits to be a strong funding source for their commercial lending businesses, according to KBW. Additionally, Ally Bank could draw interest from a traditional bank looking to bolster deposits. "We calculate that the maximum value would roughly be a 2% deposit premium, which equates to a purchase price of around $1 billion," wrote KBW analysts in a February note.

The auto finance unit of Ally Bank may garner the attention of some of the largest U.S. banks like Wells Fargo, JPMorgan, Capital One (COF)Discover Financial Services (DFS)Huntington Bancshares (HBAN) and US Bank (USB), all with the balance sheets to make a sizable acquisition, says KBW.

At the end of 2011, the North American auto finance unit had $54 billion in consumer loans and leases and an additional $32 billion in dealer loans, according to its financial statements. KBW analysts also note that the once GM-owned car lending arm still operates in 74% of the company's dealerships and in 63% of Chrysler dealerships.

With both General Motors (GM) and Chrysler reporting strong sales growth, Ally Bank's auto finance assets may warrant a premium-price in a takeover or an share sale.

Ally Bank's insurance unit has the most well documented sale plans, with reported interested parties that include Warren Buffet-run Berkshire Hathaway (BRK.A), however the business has been a hindrance to the Treasury's IPO plans.

In February, Ally and four of the nation's largest banks including JPMorgan, Bank of America (BAC), Wells Fargo and Citigroup (C) agreed to a $25 billion settlement on the litigation. That litigation iced a spring 2011 IPO.

Previous Ally owners like Cerberus, which had large Ally stakes prior to government bailouts still have significant share positions. Cerberus owns 8.9% of Ally Bank, while General Motors Trust has a 5.9% stake and General Motors has a 4% holding.

With strategic value to Ally Bank's deposit taking and auto lending businesses and some legal uncertainty removed on legal liabilities, the government may find that now is the time to exit its stake. "[The] U.S. Treasury is the majority shareholder and we do know the Treasury is looking to wind down its TARP program in the near future which could mean recouping investment in Ally through a company sale," writes KBW.

Watch for an IPO to emerge as a possibility if bidders don't come to the table or the Treasury decides that a share sale will fetch taxpayers the highest price.

8. Eddie Bauer

8 Eddie Bauer

Eddie Bauer a longtime favorite 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.

In April, Golden Gate, Veritas and Goldman Sachs (GS) sold their shares in wireless equipment maker Aeroflex Holdings (ARX), which have since fallen over 20%.

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. 

See the rest of the story at Business Insider

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