Commercial Bankruptcies: Understanding S&P's Credit Ratings

The items below are excerpted from the Business Bankruptcy News Bulletin. A full issue contains information on dozens of troubled companies, as well as informational and analysis highlights. Please visit the insideARM bookstore for information on subscribing to the Bulletin.

Below is the system of credit ratings that Standard & Poor’s applies to bonds. Ratings can be modified with + or – signs. So an AA- is a higher rating than an A+ rating. With such modifications, BBB- is the lowest investment-grade rating. Other credit rating systems are similar.

AAA    Best credit quality; extremely reliable with regard to financial obligations
AA      Very good credit quality; very reliable
A       More susceptible to economic conditions; still good credit quality
BBB    Lowest investment-grade rating
BB     Caution is necessary, best subinvestment credit quality
B       Vulnerable to changes in economic conditions; currently showing the ability to meet               its financial obligations
CCC  Currently vulnerable to nonpayment; dependent on favorable economic conditions
CC    Highly vulnerable to a payment default
C    Close to or already bankrupt; payment on the obligation currently continued
D    Payment default on some financial obligations has actually occurred

Unsecured Creditors in a Chapter 7 Proceeding and When to Elect a Trustee

When an unsecured creditor holds more than 5% or 10% of the claims against the estate in a Chapter 7 bankruptcy case, and the estate is likely to hold significant assets, the creditor should seriously consider the election of a trustee.  Motivations for electing the right trustee include: 1) holding down the volume of fees to be paid out, 2) securing a trustee whose main loyalty will be to the unsecured creditors, and 3) securing a trustee who is highly qualified for the job.

Corporate Tax Filings in a  Bankruptcy Proceeding

A corporate bankruptcy filing does not result in a new entity being set up for tax purposes. A bankrupt corporation continues with a responsibility to file tax returns as the same corporate entity with the same tax-identification number and must reflect both prepetition and postpetition income and deductions. If a trustee is appointed in the bankruptcy filing, the trustee is then responsible for seeing that tax returns are filed. Also, net operating losses and other prepetition tax items remain the same, and most postpetition costs that are permitted by the U.S. Bankruptcy Court are deductible as ordinary expenses.
 

Allied Solutions Group Inc., Broadview Heights, Oh., filed Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Ohio. The firm listed assets of between $100,000 and $1 million and liabilities of between $10 million and $50 million. The filing was under case number 10-11081. For more information contact the court at 800-898-6899.

Boot Town Western Wearhouse, also known as BTTW Retail LP, won approval for its Chapter 11 reorganization plan from the U.S. Bankruptcy Court for the Northern District of Texas and will liquidate its remaining assets. General unsecured creditors will get about 5% of their claims. The company, which filed for bankruptcy protection two years ago, has already sold off most of its stores.

General Growth Properties Inc., the Chicago firm and second largest mall owner in the nation which is being sought by Simon Property Group Inc. for $10 billion, has rejected Simon’s offer. Bankrupt General Growth, however, did not discount the offer outright, reporting it would consider any realistic bid that could help it successfully emerge from Chapter 11 protection.

Lacey Limited Partnership, Seattle, Wa., filed Chapter 11 in the U.S. Bankruptcy Court for the Western District of Washington. The firm listed assets and liabilities of between $10 million and $50 million each. The filing was under case number 10-41003. For more information contact the court at 888-409-4662. 

Reader’s Digest Association, the Pleasantville, N.Y. publisher which has completed its restructuring, is emerging from bankruptcy protection. Under its restructuring, the company’s debt will be reduced by nearly 75%–to $550 million, while at the same time it will add three new magazines to its stable of the ninety-four it currently publishes.

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