Paying for Pensions Proved Deadly, but Not Fatal
At the time the Stamford, Connecticut-based corporation bought Uniroyal Plastics, the acquisition's pension plan was underfunded by approximately $70 million. Because of this large debt, The Jesup Group's annual required contribution to Washington D.C.-based Pension Benefit Guaranty Corp. (PBGC), which secured the plan, was $20 million.
When The Jesup Group could no longer keep up these payments and it struggled to restructure, the PBGC filed notices of lien against all of its assets. As a consequence, lines of trade credit dried up, working capital lenders weren't paid fully, and the company finally filed for bankruptcy in November 1991.
As one of The Jesup Group's largest creditors, the PBGC had the right to between 41% and 44% of the company's equity after it came out of bankruptcy. The company and the agency knew that if the agency took that stock, the company no longer would be a publicly held company. Company officials and the corporate finance and negotiation department of the PBGC (headed by a Merrill Lynch investment banker) negotiated a plan. The plan would give the PBGC its equity while still allowing the company to be publicly held.
The PBGC agreed to take only 15% of the equity owed to it in common stock. It took another 27% or so in preferred stock. The rest of its claims it took in notes. "This gave the PBGC the potential practically to control the company," says Oliver Janney, vice president, general counsel and secretary of Uniroyal Technology, the name The Jesup Group took after emerging from bankruptcy.
"By not exercising the stock option, however, it enables the company to function as a public company, benefiting both parties," Janney says. Uniroyal is able to maximize its recovery, which, in turn, enables it to pay off its debt to the PBGC more efficiently.
"Everybody made compromises," says Janney about the bankruptcy proceedings. "As a result, instead of the normal bankruptcy arrangement in which a lot of people get nothing, almost everybody got something, except the equity holders."
Personnel Journal, August 1993, Vol. 72, No. 8, p. 50.