Who Can Afford to Go Broke?

Not every company that goes into bankruptcy becomes the property of a vulture. But even those that escape face steep bills, thanks to the spiraling cost of going broke.

Consider what's happening to Pacific Gas & Electric Corp. Since seeking protection from creditors in April, it has been billed more than $7 million in fees from lawyers, investment bankers, and accountants, according to court filings. The company's lead counsel, Howard, Rice, Nemerovski, Canady, Falk & Rabkin, has charged $2.6 million. Its investment banker, Rothschild Inc., wants $350,000 a month and a $20 million success fee. PG&E will also have to pay PricewaterhouseCoopers, financial adviser to its creditors, which has proposed $900,000 in fees for two months work. Industry sources figure PG&E's final tab could total $98 million.

AN EDGE. On average, a bankrupt company with $1 billion in assets pays advisers as much as $60 million to help strike a deal with creditors (table). One of the highest fees to a single adviser is the $21.5 million earned by Dresdner Kleinwort Wasserstein for saving bankrupt satellite company ICO Global Communications from liquidation. DKW asked for $45 million for raising $1.2 billion in equity in less than a month. But that could soon be surpassed. Some banking sources estimate UBS Warburg could pull in as much as $100 million for services to bankrupt wireless startup NextWave Telecom Inc. That would be just shy of Wall Street's largest disclosed mergers-and-acquisitions fee in 2000: the $102 million split between Bear Stearns, Goldman Sachs, Merrill Lynch, and Lazard Freres for selling Warner-Lambert to Pfizer. UBS Warburg declined comment.

Of course, good advice can be worth the money. Fiber-optic service provider 360networks filed for bankruptcy protection in June, encouraged to do so early by their restructuring adviser Lazard Frères & Co. and law firm Wilkie Farr. By acting fast, they may have gained an edge over competitors. "Level 3 will have about $750 million a year in interest payments, whereas we are likely to have less than $50 million. That should be a big advantage for us." says CEO Gregory B. Maffei.

The cost of advice on corporate survival has soared so high that the Office of the U.S. Trustee, which reviews fees charged in reorganization plans, is filing objections in bankruptcy courts to the size of the fees that turnaround artists are charging--such as in the case of bankrupt steelmaker LTV Corp.

It's unclear if such efforts will reduce fees yet. But worries about the high cost of bankruptcy have kept some companies out of Chapter 11. Recently, creditors have been cutting deals with companies called "distressed exchanges," in which bondholders forgive a company's debt in return for cash, new bonds, and common stock. "This saves the time and expense of bankruptcy," says Don Morgan, head of the high-yield group at money-management firm MacKay Shields LLC.

But until such deals become the rule, companies better expect to pay big bucks--even if they're in financial distress.

By Emily Thornton in New York, with Christopher Palmeri in Los Angeles

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