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'Strategic alternatives'

Restructuring experts can hold pension plans’ future in their hands

Bankruptcy wave spurs greater corporate demand for pension specialists

AMR tails

The debate over the future of American Airlines' four defined benefit plans highlights the growing importance of restructuring experts who understand pension plans.

With potentially $9 billion in unfunded pension liability at stake in its Chapter 11 bankruptcy protection case, American parent AMR Corp. is not a typical case because it could be the largest corporate pension termination in U.S. history. But regardless of the size of the pension plans at stake, the demand for such experts is on the rise.

One big reason that companies need help assessing the viability of their pension plans recently has been the low interest rates that have triggered higher pension contributions that, in turn, strain corporate balance sheets.

Increasingly, companies are addressing pension matters in restructurings, mergers and acquisitions and in pre-emptive situations that are unrelated to any specific financial transaction, said Michael A. Kramer, head of the restructuring group at New York-based Perella Weinberg Partners, which is advising AMR on its restructuring. The financial services firm has separate advisory and asset management divisions, with the latter kept strictly separate. “We realized that pensions were becoming a more important aspect of any corporation,” Mr. Kramer said.

“It always comes back to the cash payments,” said Charles Moore, senior managing director with turnaround and restructuring firm Conway MacKenzie Inc. in Birmingham, Mich., and a past official with the Turnaround Management Association, Chicago. “Pension contributions as a primary cause of distress seemed to go away for a while, but now people are focusing more as liquidity becomes a problem. For companies that are in distress with their DB plans, it is unavoidable to consider whether to terminate, even before it gets too bad.”

Termination is not the only option, of course. Pension plan freezes and modifications to contributions are among the options that are examined.

Perella Weinberg was hired by Fort Worth, Texas-based AMR after the company filed for Chapter 11 on Nov. 29, to analyze American's labor pacts and pension plans, to offer “strategic alternatives” to those pension claims, and to help negotiate with “third parties,” according to court documents.

For AMR and many other distressed companies, the most notable third party is the Pension Benefit Guaranty Corp. Not surprisingly, many restructuring firms specializing in pension issues have PBGC alumni on their teams who have seen firsthand how the PBGC fights to resist or mitigate plan terminations.

“We understand how the process goes, and how the (PBGC) staff think,” said Laura S. Rosenberg, Washington-based senior vice president at Fiduciary Counselors Inc., which handles corporate restructuring cases involving defined benefit and defined contribution plans. Ms. Rosenberg was a manager of the Corporate Finance & Negotiations Department at the PBGC from 1992 until 2004.

In many cases, the PBGC is the client of the restructuring firm — not the adversary. Perella Weinberg, for example, is advising the PBGC in Eastman Kodak Co.'s Chapter 11 case, filed in January. But it also will be negotiating against the PBGC on behalf of AMR and Hostess Brands, which also filed for Chapter 11 protection in January. “We've had the benefit of being on multiple sides of the table,” Mr. Kramer of Perella Weinberg said.

The PBGC's unique charter makes it a more nimble negotiator than most government agencies, said former PBGC general counsel James Keightley, whose Washington-based law firm of Keightley & Ashner LLP specializes in employee benefits cases that include PBGC matters. “Even though PBGC is a federal governmental entity, it has essentially the same flexibility as any private entity to agree to creative settlements. It is a small agency with a relatively flat management structure and can finalize decisions quickly.”

Before the negotiating over changing or terminating pension plans begins, there is a lot of homework to be done by a lot of specialists, including financial and legal experts, accountants, actuaries and even investment bankers. “Very commonly you're going to see all of them. It's amazing how many parties can be involved,” said Conway MacKenzie's Mr. Moore.

As bankruptcy cases get more complex, there is no such thing as a standard approach. “Every situation is different. This is a very detailed and eccentric world,” said Mr. Kramer of Perella Weinberg.

“It is a unique process,” agreed Ms. Rosenberg. “You don't restructure a pension the same way as a bond. It's not intuitive.”

Thomas A. Morrow, managing director with AlixPartners LLP, New York, said “these are very complex negotiations, based on millions of different assumptions. There is no formula.” AlixPartners is a consulting firm focusing on corporate restructuring, management consulting and financial forensics, a type of investigative auditing.

Still, Ms. Rosenberg noted, “At the end of the day, we're talking about money. We look at how a settlement would impact a company financially, and whether the pension plan is or is not affordable.”

With an emphasis on negotiating, “there is a lot of room for creativity and the amount of the claim can be negotiated,” said Mr. Morrow, whose firm will be across the table from Perella Weinberg and the PBGC in the Kodak case and which has represented General Motors, LTV Steel, Fleming Co. and K mart.

The LTV pension plans were distress terminations, while a restructured GM assumed all of its defined benefit plans. For Fleming's five plans, Alix Partners helped negotiate the handing over of the largest plan to the PBGC, while four other plans stayed with the grocery supplier reorganized as CoreMark.

Ms. Rosenberg said her firm emphasizes that “not everything has to be adversarial” and it is often called on to help educate the other members of the reorganizing firm's creditors' committee, if the case gets to the bankruptcy stage.

Being a member of this specialized club also helps reduce tensions and save clients' money. “Those relationships can be very helpful,” Mr. Morrow said. “It is far better to work proactively with folks about pensions, because it can use up a lot of time and money to fight it.”

The possibility of being hired or recommended by someone you last saw on the other side of the negotiating table also helps to keep it civilized, as does a background in investment banking, Mr. Kramer added.

As the cases and the expertise needed become more complex, bankruptcy court judges want to see as much worked out as possible in advance, the experts say. “If it's well done, it's entirely wrapped up before the day in court,” Mr. Morrow said. Judges don't like to be in the middle and they really push the parties to work it out themselves. “Bankruptcy in some ways is kind of like a divorce. A well-managed bankruptcy is when everyone is equally unhappy.”