Companies increasingly shun bankruptcy court

By Chelsea Emery

NEW YORK (Reuters) - A slew of high-profile corporate bankruptcies has obscured a quieter trend: More companies are shunning bankruptcy filings to settle problems out of court, pushed by major investors looking for quicker and less disruptive options.

The trend is being driven by hedge funds, private equity firms and distressed debt investors who are taking ever-larger stakes in troubled companies in the hope of maximizing their profits by pushing the companies to restructure or sell themselves.

"The players have changed," said Stuart Hirshfield, head of the bankruptcy team at law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.

In the past, a troubled company, or debtor, and its lenders and trade creditors worked together to salvage a distressed business in bankruptcy. Trade creditors in particular were aggressive in their restructuring efforts, in effect saving their customer for their own long-term gains.

"But that's all changed due to the multiple levels of debt, much of which is held by hedge funds and distressed debt traders," said Hirshfield. "Their interest is in getting a faster return on their investment, such as buying debt at 50 cents and receiving a return of 70 cents quickly through a sale or liquidation."

He declined to give specific examples.

FEWER FILINGS

Some 30,000 businesses filed for bankruptcy over the year ended March, according to the Administrative Office of the US Courts. That is down from 35,000 filings for the year ended March 2006.