Transcript KMART - Pacific Lutheran University

Enron and Kmart
Go Bankrupt
Filing Chapter 11 - Reorganization
PRESENTED BY:
Jang-Woong An
Melissa Cole
Todd Haberly
AGENDA
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Bankruptcy Filing Options
The Process of Chapter 11
Information about Enron
Enron’s alternatives to filing bankruptcy
Factors that lead Enron to file Bankruptcy
Why Enron chose Chapter 11
Post-Bankruptcy Timeline
Enron’s Proposed Reorganization Process
Factors that lead Kmart to file Bankruptcy
Why Kmart chose Chapter 11
Goals and where Kmart and Enron are in the
Reorganization Process
Bankruptcy Filing Options
Issue
Purpose
Who Can Petition
Who Can Be a
Debtor
Procedure
Leading
To Discharge
Advantages
Chapter 7
Liquidation
Debtor (voluntary) or
creditors (involuntary)
Any “person” (including
partnerships and
corporations) except
railroads, insurance
companies, banks, savings
and loan institutions,
investment companies
licensed by the Small
Business Administration, and
credit unions. Farmers and
charitable institutions cannot
be involuntarily petitioned.
Chapter 11
Reorganization
Debtor (voluntary) or
creditors (involuntary)
Any debtor eligible for
Chapter 7 relief;
railroads are also
eligible.
Nonexempt property is sold
with proceeds to be
distributed (in order) to
priority groups.
Dischargeable debts are
terminated.
On liquidation and
distribution, most debts are
discharged, and the debtor
has an opportunity for a fresh
start.
Plan is submitted; if it is
approved and followed,
the remaining debts are
discharged.
Debtor continues in
business. Creditors can
either accept the plan, or
it can be “crammed
down” on them. The
plan allows for the
reorganization and
liquidation of debts over
the plan period.
Chapters 12 and 13
Adjustment
Debtor (voluntary) only
Chapter 12 – Any family farmer
(one whose gross income is at
lease 50 percent farm dependent
and whose debts are at least 80
percent farm related) or any
partnership or closely held
corporation at least 50 percent
owned by a farm family, when
total debt does not exceed $1.5
million.
Chapter 13 – Any individual
(not partnerships or
corporations) with regular
income who owes fixed
unsecured debts of less than
$269,250 or fixed secured debts
of less than $807,750.
Plan is submitted and must be
approved if the debtor turns
over disposable income for a
three-year period; if the plan is
followed, debts are discharged.
Debtor continues in business or
possession of assets. If the plan
is approved, most debts are
discharged after a three-year
period.
The Process of Chapter 11
• Step 1: A petition is filed in bankruptcy court, either by the
debtor - the company in financial difficulty - or in rare cases, by a
creditor or group of creditors of the debtor.
• Step 2: After filing, the debtor is referred to as the debtor in
possession because the debtor keeps the business and its assets
and continues to run it.
• Step 3: In vary rare cases of fraud, dishonesty, incompetence or
gross mismanagement, the bankruptcy court may appoint a trustee
to run the business.
• Step 4: The debtor in possession (or the trustee) must file:
– A list of creditors
– A schedule of assets and liabilities, current income and expenditures
– A statement of the debtor’s financial affairs
Chapter 11 Process Cont.
• Step 5: One hundred and twenty (120) days after the filing of the
petition, the debtor in possession must file a plan for the
reorganization of the business. An appointed trustee may also file
a plan, and the creditors have the right to file a plan under certain
circumstances.
• Step 6: Creditors in each specified “class” of creditors shareholders, secured creditors, unsecured creditors - have the
right to approve the plan. Each respective class has certain voting
rights depending on the number and nature of the classes and the
overall vote of creditors. If the creditors approve the plan, it must
also be confirmed by the bankruptcy court.
• Step 7: If the plan has been carried out successfully, the debtor is
discharged from debts that arose before the confirmation of the
plan and the business may continue to operate.
Enron (A Brief Summary)
• Fundamental Issue around Enron: Multiple
Conflicts of Interest among relevant parties
• Executives
• Personal gains (through compensation & increased stock price)
vs. Fiduciary duties (to shareholders, creditors, employees and
the Corp.)
• Board of Directors
• Personal gains (through compensation & increased stock price)
vs. Fiduciary duties (overseeing the management conducts)
• Andersen
• Auditing vs. Non-audit services
• Regulators (Federal Government & Congress)
• Fundraising vs. Regulation
Enron (Summary Cont.)
• Outcomes of Conflicts
• Executives benefited from inflated profits and the
partnerships while banning employees’ stock sales.
• The board revised the code of ethics to allow the
executives’ direct involvement to the questionable
partnerships.
• Andersen supported the establishment of partnership
while ignoring the foreseeable problem.
• The personal relationship with the regulators led Enron
to become the seventh largest U.S. corporation. The
SEC allowed Andersen to provide auditing and
consulting services to a single client.
• Enron’s Filing for bankruptcy on December 2
Enron’s Alternatives to Filing
Bankruptcy
• Merger with Dynegy ($7.8 billion takeover deal)
• Terminated on November 28 due to Enron’s
misrepresentation of financial condition and the
dropped value of Enron’s core energy trading business
• Options after Dynegy’s termination
• Chapter 7 Bankruptcy (the least likely and least
desirable option)
• Chapter 11 Bankruptcy
• Securing more financing from creditors, the closing of
previously announced asset sales and additional asset
sales (unavailable due to Enron’s downgraded credit
rating)
Factors that lead Enron to file
Bankruptcy
• Uncovered fact (inflated profits & hidden debts)
• Losing credibility and the difficulty to access cash
and credit hurt Enron’s energy trading business
that is responsible for 90% of its income
• Threatening lawsuits against Enron
• The failure of $7.8 billion the merger deal with
Dynegy
• Inability to reshape investors’ confidence
Why Enron chose to File
Chapter 11 Bankruptcy
• Seeking legal protection from creditors’ claim
against its assets
• Avoiding the wholesale of the entire company
• Opportunity to continue in business while
liquidating non-profit assets
• Seeking court approval to use the portion of $1.5
billion debtor-in-possession
Post - Bankruptcy Timeline
• December 2 - Enron files for Chapter 11
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protection in New York
December 4 - Enron sells Enron Direct to Centrica
for $137 million
December 5 - Enron sells certain Canadian power
assets to TransCanada and AltaGas for $140.1
million
December 7 - Creditors file change of venue
motions from New York to Houston
December 10 - Post-petition lender JP Morgan
sues Enron for a return of trade receivables that
backed credit facilities for Sequoia
Timeline Cont.
• December 18 - The judge, Arthur Gonzalez,
dismissed the unsecured creditor Wiser Oil’s
demand for documentation
• December 20 - The judge excuses Enron’s two
utilities from their natural gas service contracts
until a venue is decided
• December 28 - The court approved Enron to sell
$310 million in assets from subsidiaries Enron
Wind Development Corp. and Enron Canada
• January 3 - The court approved Enron to terminate
600 to 700 power supply contracts
Timeline Cont.
• January 4 - Enron agrees to sell its Northern
Natural Gas pipeline to Dynegy
• January 7 - The judge hears the change of venue
arguments
• January 11 - UBS Warburg wins Enron’s
wholesale energy trading business
• January 15 - UBS Warburg announces to pay
royalties instead of cash for the deal
Timeline Cont.
• January 16 - Creditors are expected to seek the
recovery of assets under the Fraudulent
Conveyance Law that gives the court an
opportunity to scrutinize pre-bankruptcy
transactions that may have been designed to drain
assets out of company
• January 17 - Enron fired Andersen as its auditor
• January 18 - The court approved the UBS deal
• January 23 - Kenneth Lay resigned as Enron’s
chairman and CEO
Timeline Cont.
• January 30 - Stephen Cooper was appointed as
Enron’s new CEO and the chief restructuring
officer and Sempra Energy buys Enron Metals for
$145 million
• February 12 - Enron announces the plan of
reducing its board members from 14 to 8
• February 20 - Enron agreed to sell its Wind assets
to GE
• May 3 - The CEO announced its proposal to
emerge from bankruptcy
Enron’s Proposed
Reorganization Process
• A new form of the company, the OpCo Energy Co., will
have about 16,000 miles of natural gas pipeline assets and
6,700 megawatt capacity of power operations stretching
from the United States to South America
• With $10.8 billion in assets and 12,000 employees, the new
company will generate about $3 billion in revenue and
about $350 million profits in the first year
• The new company will operate out from the bankruptcy
proceeding to maximize creditors’ recovery and later it will
be either sold, merged or run on its own
• Creditors will be entitled to the assets in any cases (sales,
merger or run on its own)
Factors that lead Kmart to
file Bankruptcy
• Below planned earnings from recent holiday
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Unsuccessful marketing initiatives
Intense competition in discount retail industry
Overall Economy down
Enron’s collapse - raised insurance premiums and
hurt bond market
Decline in consumer and supplier confidence
Why Kmart chose Chapter 11
Bankruptcy
• Terminate leases of approx. 350 stores that were
previously closed or being rented by other tenants.
Could result in annual savings of $250 million.
• Save $350 million through staff reductions, office
consolidations, and other actions.
• “Shed extra weight” and once again able to
compete
• Shield itself from creditors while reorganization
plan is developed
Kmart’s Goals and their position in
the Reorganization Process
• Says it will reorganize on a “fast-track” basis and
emerge from Chapter 11 in 2003
• As of now, all 2,114 Kmart stores remain open
• Plan to invest in key merchandising and marketing
initiatives
• Want to emerge from bankruptcy as a stronger,
more dynamic, more profitable enterprise with a
well-defined position in the discount retail sector
Enron’s Goals and their position
in the Reorganization Process
• Even though future does not look bright, a “slimmed down”
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Enron that could create value for the creditors is planned
Enron has outlined a proposal to create a new power and
pipeline company with operations stretching from United
States to South America
New company will go by the name OpCo Energy Co.
The reorganization process allows Enron to shed moneylosing assets and shape up a new company that could be
sold, merged or run on its own
Creditors would pocket most of the proceeds from a sale or
merger or own stock in an ongoing business
Thank You
Questions?