The Chapter 11 Financial Advisors

Abstract:     
It has been observed that large chapter 11 cases have become increasingly “professionalized.” In particular, while once debtor’s counsel might have handled the bulk of the reorganization, the debtor now routinely retains specialized professionals to address specific aspects of the case. Among the most controversial of these non-legal professionals have been the financial advisors, as they often earn transaction fees based on either the sale or reorganization of the debtor.

This short paper looks at the cost of financial advisors in chapter 11 cases by utilizing a sample of chapter 11 cases filed in 2004. Among other things, this paper shows that financial advisors, although receiving much attention and criticism, actually cost slightly less, on average, than the debtor’s bankruptcy attorneys. I also model the costs of financial advisors and find that cost increases if both the debtor and the committee retain financial advisors. Costs also increase with the contentiousness of the case, which I suggest reflects a tendency to focus on the large, lump-sum fees earned by financial advisors in such cases. I conclude by noting how little the Bankruptcy Code as drafted in 1978 is suited to the types of compensation structures that financial advisors and turnaround consultants normally receive. Looking at the specific issue of section 328(a), I argue that it may be time to revamp large parts of the Code to reflect the reality of modern chapter 11 practice.

Number of Pages in PDF File: 24

Keywords: Chapter 11, Direct Costs, Professional Fees, Financial Distress Costs

Accepted Paper Series