Nov. 11 (Bloomberg) -- When Euramax International Inc. was struggling in 2008 amid the worst economic crisis since the Great Depression, lenders to the building-materials maker reorganized its debt to prevent a collapse.

By forming creditor committees earlier, an out-of-court restructuring for the Norcross, Georgia-based company allowed lenders to receive a full recovery, Chief Financial Officer Scott Vansant said yesterday. The average recovery rate through bankruptcy may be as little as 35 percent of face value this year, according to Moody’s Investors Service.

As defaults climb above 200 this year, creditors of companies from R.H. Donnelley Corp. to Accuride Corp. are banding together at the first signs of distress. Working with executives to arrange prepackaged bankruptcies is allowing investors to recoup 5 percent more of their money on average than in standard filings, according to Moody’s. The cooperative filings between lenders and management are up 26-fold in the past two years, Moody’s data show.

“In this economic melee, if they didn’t get proactive and didn’t have sufficient and appropriate information, committees do run the risk of being directed by what a debtor wants as opposed to what they should be getting out of the company,” said Kevin Lavin, a senior managing director at FTI Consulting in New York who specializes in restructurings.

The unemployment rate rose to 10.2 percent in October, the highest level since 1983, threatening a sustained recovery, the Labor Department said Nov. 6. The U.S. economy is expected to shrink 2.4 percent this year, before growing 2.5 percent in 2010, according to the average estimates of economists surveyed by Bloomberg.

‘New Normal’

Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds, has called for a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S.

Creditors are experiencing their own new normal, seeking to navigate through higher default rates and lower recoveries by banding together early, Lavin said.

Corporate defaults have almost tripled this year to 239 issuers, compared with 82 in 2008, Standard & Poor’s said last week in a report. The 12-month forecast for U.S. high-yield bond failures is 6.9 percent, the ratings company said last month.

More defaults mean the amount of face value investors can expect to recover is lower. The rates may range from 35 percent to 40 percent this year, compared with 66 percent from 2005 to 2007, according to Moody’s. When defaults last rose in the periods ended in 1991 and 2002, the amounts averaged 45 percent.

“Higher default rates historically have translated into lower recoveries at the company level,” David Keisman, a senior vice president in the corporate finance group at Moody’s, wrote in the report. “That phenomenon could be magnified this year with a forecast of default rates higher than those experienced during 1990-1991 or 2001-2002.”

Plan in Place

In a prepackaged bankruptcy, committees representing lenders work with managers and owners to set up a plan before a company files for Chapter 11 protection.

An analysis of 167 prepackaged bankruptcies from 1989 through April 2009 by New York-based Moody’s shows a 54.6 percent recovery rate from prepackaged bankruptcies, compared with 49.4 percent for a standard filing. There have been 26 pre- packaged bankruptcies this year through July 31, compared with 1 in 2007, according to Moody’s.

CIT Group Inc., based in New York, filed a plan for a prepackaged bankruptcy Nov. 1 after a U.S. bailout last year failed and the 101-year-old commercial lender was unable to gain bondholder approval for a debt exchange.

‘Free-Fall’

Bondholders of CIT, the fifth-largest company by assets to enter bankruptcy, will get 70 cents on the dollar in the form of new notes and equity in the reorganized company. If CIT had been forced into a “free-fall” bankruptcy, unsecured claims would have fetched as little as 6 cents on the dollar, Jeffrey Peek, the company’s chief executive officer, said last month.

Accuride filed for a prepackaged bankruptcy after reaching an agreement with a group of holders of its 8.5 percent senior subordinated notes and a steering committee of senior lenders, the Evansville, Indiana-based maker of commercial wheels said in a statement on Oct. 8.

The company began discussions with creditors led by Deutsche Bank AG in July when it received a waiver on covenants contained in its credit agreement, the company said in an Aug. 14 statement.

Accuride had $275 million of 8.5 notes outstanding as of June 30, according to an Oct. 7 filing with the Securities and Exchange Commission. It had about $354 million of senior debt as of June 30, according to the filing.

Eva Schmitz, an Accuride spokeswoman, declined to comment.

‘Extremely Influential’

“The reason why these groups form is they are extremely influential,” said Fred Hodara, head of the financial restructuring practice group at Akin Gump Strauss Hauer & Feld LLP. “There’s absolutely no doubt in my mind that it pays off for them because they are in direct dialogue with management of the company early on, and it enables them to help shape the solution.”

Euramax amended and restated its first-lien agreement with lenders for $513 million, the company said July 14. Acquired in 2005 by a fund managed by New York-based Goldman Sachs Group Inc., Euramax also had retired its second-lien loan by exchanging it for equity, according to the statement.

“With ad hoc committees, if there are guys that feel that they are going to own equity, they want to be as informed as possible to be able to impact, and hopefully direct, the process,” said Lavin, who works with debtors and creditor committees. He declined to comment on specific transactions.

Restructuring Proposal

Lenders started to negotiate with Euramax in early 2008 about a proposed loan amendment, granting its first forbearance agreement that November, Vansant said. Talks shifted toward restructuring by the end of the year,

“Had they not organized, it very likely would have increased the risk of a filing,” Vansant said.

A restructuring proposal was approved by all first-lien and second-lien lenders in June, helping reduce outstanding debt to less than $540 million from about $920 million, according to the July 14 statement.

The first-lien lenders were repaid in the form of new debt, Vansant said. The loans are currently trading at a discount to face value, he said. Second-lien lenders were given 100 percent of equity in the company, he said.

“From our perspective, it was better that they formed soon and could speak with one voice,” Vansant said. “I’m not sure how, without early formation, you have meaningful dialogue between a number of people.”

R.H. Donnelley

Cary, North Carolina-based R.H. Donnelley said May 29 about $6 billion of unsecured bonds would be exchanged for 100 percent of the equity in a restructured company and $300 million of unsecured notes

Steve Blondy, R.H. Donnelley’s chief financial officer, referred calls to Thomas Becker, a spokesman for the publisher of telephone-book yellow pages, who declined to comment.

“We’ve been seeing creditors forming committees far in advance of bankruptcies,” said Steven Khadavi, a partner at Minneapolis-based Dorsey & Whitney LP who focuses on debt exchanges. Creditors are more aggressive and starting to organize earlier. “There is power in numbers,” he said.

To contact the reporters on this story: Kristen Haunss in New York at khaunss@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

Last Updated: November 11, 2009 00:00 EST