Bankruptcy services companies find growth in downturn

A worker is seen carrying a box out of the U.S. investment bank Lehman Brothers offices, in the Canary Wharf district of London in this September 15, 2008 file photograph.

BANGALORE (Reuters) - Investment bank Lehman Brothers Holdings (LEHMQ.PK) filed for bankruptcy in September 2008 and since then it has been hounded by 175,000 potential creditors with a total claim value exceeding $9 billion.

A wave of big-ticket bankruptcies followed in its wake - taking down companies as varied as Washington Mutual, Circuit City and Nortel Networks.

However, at its headquarters in Kansas City, executives of software maker Epiq Systems Inc (EPIQ.O), which runs a bankruptcy software and services unit, were seeing a sea of opportunities in the daunting reorganization Lehman was faced with.

"It is one of the few companies that do well when other companies are not," said John Carraux, an analyst at Punch & Associates Investment Management, which holds Epiq stock.

Epiq's bankruptcy services unit offers software and related services that simplify tasks associated with Chapter 11 restructurings, Chapter 7 liquidations and Chapter 13 individual debt reorganizations.

Eventually, Epiq did manage to clinch the Lehman job - the largest bankruptcy in the history of United States with more than $600 billion in liabilities.

The company followed that up with key account wins such as Lyondell Chemical Co, Nortel Networks Inc and Smurfit-Stone Container Corp.

Epiq, along with Kurtzman Carson Consultants LLC (KCC), leads the fast-growing Chapter 11 restructuring segment. KCC agreed on Monday to be acquired by Computershare Ltd (CPU.AX), as the world's biggest share registrar expands into areas such as bankruptcy.

Companies offering broader bankruptcy services include Crawford & Co-owned (CRDb.N) Garden City Group, Bankruptcy Management Solutions -- in which Ocwen Financial Corp (OCN.N) holds a stake, and AlixPartners.

Key services offered by these firms include identifying creditors and processing the claims, notifying parties concerned about key dates and deadlines, running administrative work related to bankruptcy-exit plans and executing payments to creditors.

Bankruptcies these days have become long-winded due to the complex nature of holdings in a corporation, and require professional help with managing the avalanche of documents.

Elizabeth Vrato, a business development executive with Garden City Group, said critical issues involving liquidity and covenants have resulted in an uptick in business, ranging from out-of-court restructurings and asset sales to Chapter 11 filings and the length of the workday.

"Restructuring nowadays is sort of like a marathon," Vrato said. "It's not for the short-winded."

SPURT IN CHAPTER 11

According to the Administrative Office of the U.S. Courts, Chapter 11 filings jumped 60 percent in 2008. Overall bankruptcy filings rose 31 percent during the period.

"As companies seek ways to navigate and recover from the current economic climate, we foresee continued increasing demand for corporate bankruptcy services over the next few years," said Jonathan Carson, president and co-founder of KCC.

Epiq's Chapter 11 business will grow at least 75 percent in 2009. It is likely to double in 2010 from 2008 levels, estimates Richard Shannon, an analyst with Northland Securities.

The company expects double-digit revenue growth over the next three years, Chief Executive Tom Olofson said.

KCC, which said its Chapter 11 business more than doubled in size over the past 12 months, holds accounts such as Pilgrim's Pride Corp, Verasun Energy Corp and Washington Mutual.

The reputation based on prior work and a relationship with top law firms handling bankruptcies are the key factors influencing account wins in bankruptcy services, said Shannon, who has an "outperform" rating on Epiq stock.

Analysts expect companies such as Epiq and KCC to see strong growth from bankruptcies at least for the next two years.

HOW LONG?

So the big question is, how will these companies sustain their growth in the absence of a catalyst like bankruptcy once the economy recovers.

Revenue will come down a little bit when the situation wears out, but there is always a natural churn in the economy for bankruptcies, said Sam Chang, an analyst with Turner Investment Partners, which holds Epiq stock.

"That's how you can look at a counter-cyclical stock, it is not going to work as well in a strong economy," Chang said.

About 65 percent of Epiq's revenue is split between electronic discovery, which provides processing and search, review services, and settlements administration.

The electronic discovery business, which benefits from a trend in the legal system toward using more efficient software, will steady Epiq's growth, said Carraux of Punch & Associates.

"Our interest was from the diversification standpoint. The drivers of Epiq's business really don't relate to the macro economy in a large way," said Carraux, who focuses on small-cap technology stocks.

Early last week, KCC's Carson had said the company's growth plans included diversifying into a business process outsourcing provider to the broader legal and financial services market.

"Our long-term plan encompasses a broader array of services for the legal and financial services markets to adapt to clients' needs and the changing economic environment."

KCC appears to be on track with its growth strategy, as it now joins Computershare, the Australian company which has a larger footprint and a focus on the financial industry.

However, rival Epiq wants to remain an independent company.

"Our plan is to continue Epiq as a free-standing public company. We feel that we have some very significant and attractive growth opportunities," he said.

Shares of Epiq Systems rose about 12 percent during the last one year. The broader S&P 1500 Application Software Sub-Industry Index .15GSPCMSF declined 33 percent during the period.

(Editing by Saumyadeb Chakrabarty, Anil D'Silva)