By Renee McGaw
Denver Business Journal features J. Gregory Barrow
Colorado business bankruptcy filings rose in the first three months of the year, as businesses faced tighter credit conditions and rising gasoline prices.
For companies such as General Capital Partners LLC, a Denver-based investment bank that specializes in distressed middle-market companies and commercial properties, that’s not such bad news.
“Everything we do is either in Chapter 11, in default or pending default,” said J. Gregory Barrow, co-founder and managing director of the 4-year-old company, whose clients have included Adam Aircraft Industries and Koala Corp. “We don’t work with any healthy companies.”
Its pool of potential clients is widening. Colorado business bankruptcy filings rose 28 percent in the first quarter of 2008 compared with the same period a year earlier, to 177, according to U.S. Bankruptcy Court data. Filings under Chapter 11, for reorganization bankruptcy protection, rose to 26 in the first quarter, up 62.5 percent from the same period in 2007.
Individual liquidation bankruptcy, or Chapter 7, filings rose by nearly 40 percent in the first quarter, to 3,570. That’s all the more remarkable considering that federal bankruptcy law reform in 2005 made it much more difficult and expensive for people to file under Chapter 7.
“It’s hard to find lawyers to do it, because they’re held to a very high standard of knowledge about the finances of their clients,” said Dirk de Roos, a partner at the law firm of Faegre & Benson in Denver. “To see an uptick in bankruptcy when you know that it’s a riskier thing for the lawyers, these are situations where these debtors must be really bad off. Because marginal stuff, the lawyers won’t do it.”
Business bankruptcy cases are rising, as well, partly as a result of the current subprime mortgage-related credit crunch.
“Once mortgage lenders have problems, then banks have problems, and once banks have problems, everybody tightens up credit in general,” de Roos said. “If you’ve got a line of credit or something that you took out, and it comes due with a big balloon [payment] and you thought you were just going to refinance it — you can’t do it.”
A good example is Adam Aircraft, an Englewood-based very light jet manufacturer that filed under Chapter 7 in February.
“That was a wonderful, up-and-coming company,” de Roos said. “They had started out little, and then they needed $100 million to grow. But they had to pick the worst afternoon of the worst week in the past 50 years. They couldn’t refinance, and they had to go out of business.”
A deal was struck on April 4 to sell Adam Aircraft to an entity called AAI Acquisition Inc. for $10 million. General Capital Partners worked behind the scenes to help get it done, by marketing Adams Aircraft’s remaining assets — including aircraft, patents, contracts and backlogged orders — to potential buyers.
General Capital Partners’ typical client has assets valued at between $10 million and $50 million. “We either get them refinancing, find a joint venture partner or sell them as a going concern, to maximize value for the estate,” Barrow said.
Current clients include a coal mine in central Appalachia, a regional shopping mall in Houston, and a 193-room Silicon Valley hotel.
Last year, General Capital Partners helped sell SCS Interactive, a company that makes large water amusement park play structures, to WhiteWater West Industries of Canada for $5 million. The company was the primary remaining asset of Denver-based Koala, which filed for Chapter 11 bankruptcy in March 2007.
The price it eventually secured was more than the $3 million that Koala executives expected to get from a sale of remaining assets, according to courtroom testimony in April 2007.
Chapter 11 filings, historically low in Colorado, are rising, Barrow said.
“When you file Chapter 11, it’s because your capital structure is incorrect … you don’t have enough money to operate, or you have money that’s too expensive,” he said. “I think that what you’re seeing around here is that traditionally local banks were lending to local companies … and typically any trouble that arose was probably handled quietly, behind closed doors.”
But an increasingly complex financial market, in which debt is bundled up and sold to investors far beyond Colorado, has changed the picture.
“There is sort of a latent problem with a lot of the financing that businesses had in place, and I think the push of the economy falling in the last six to 12 months, it may have led many of these companies to have to file Chapter 11,” Barrow said.