Many companies limped through the Great Recession with impaired balance sheets, but there is a great “wall of debt” scheduled to mature between 2012 and 2015 and these companies need to act now to fix their capital structures. A prearranged bankruptcy is a powerful tool to move a company through bankruptcy proceedings quickly, inexpensively, and with minimal disruption to the business. The end result can be a firm that’s leaner, adequately financed and more competitive. Companies looking to act now to fix their capital structures may want to consider these five essential elements to a successful prearranged, Chapter 11 plan of reorganization.

Prearranged bankruptcies, which have long been a viable option for companies undergoing a restructuring, are on the rise and for good reason. A well executed prearranged bankruptcy--where most of the biggest creditors agree to a plan of reorganization before going to court-- allows a company to secure attractive financing, maintain the trust of employees, customers and suppliers, and move through the bankruptcy process much more quickly and inexpensively than a standard bankruptcy filing.

Moving swiftly through the bankruptcy process is particularly important today. Many companies limped through the Great Recession with impaired balance sheets, but there is a great “wall of debt” scheduled to mature between 2012 and 2015 and these companies need to act now to fix their capital structures. What’s more, as the economy emerges from recession and begins to grow, companies need to position themselves to capture that growth. Being hobbled by an overleveraged balance sheet or being stuck for a prolonged period in bankruptcy court is certain to put a company at a competitive disadvantage.

There are five essential elements to orchestrating a successful prearranged, Chapter 11 plan of reorganization (POR).

1. Examine the Circumstances. The first thing to remember is that prearranged bankruptcies aren’t for every company. Pre-arranged plans are best suited to companies that need to fix an inadequate or overleveraged capital structure and have sufficient unencumbered assets or cash flow to secure debtor-in-possession (DIP) financing and exit financing.

A prearranged bankruptcy is not a viable option for a company needing to discontinue certain lines of business or in the case of 363 sales, which involve the sale of individual assets delivered to the purchaser free and clear of any liens or encumbrances. Neither is a prearranged bankruptcy useful if litigation is involved; litigation implies that major parties have taken adversarial positions and prearranged bankruptcies only work if the major stakeholders can align their positions.

2. Secure Liquidity. Liquidity is essential in order to continue smooth operations while the prearranged bankruptcy is negotiated. Liquidity can come from both internal and external sources. Internally, a company can defer some capital expenditures and cut costs to create liquidity. But companies need to be careful. Deep cuts can shake the confidence of stakeholders in the company’s long-term viability. For example, a round of layoffs that hurts morale and sends other key employees looking for work could be very counterproductive.

For external liquidity a company should seek a lender familiar with the restructuring process and who will be a good partner. Ideally, a financing package includes DIP financing--so the company can maintain adequate liquidity during the bankruptcy period itself--and exit financing--so the company will emerge from bankruptcy with adequate capital to compete. This is a sophisticated package of financing and it takes a lender who is steeped in the bankruptcy process and understands not just the company, but the marketplace in which it competes.

3. Understand Stakeholders. Prearranged bankruptcies require that at least 67 percent of the creditors agree to the plan, so an early and clear picture of the different creditors and their primary motivations is essential to line up the necessary votes before formal solicitation. This is a complicated undertaking. Often there are differing views of the enterprise value of the company and what constitutes the fulcrum security, or the debt instrument most likely to be converted into equity in a reorganized company.

For example, a second lien lender may perceive that they are the fulcrum security at a certain enterprise value. However, the unsecured note holders may believe that the company value is greater and that they are the fulcrum security. Coming to terms with the business valuation and finding common ground is critical to a prearranged filing.

Not all the stakeholders are in the capital structure and get to vote. But it’s important to understand their interests as well. A company’s suppliers, for instance, want a healthy, thriving customer. And key employees want a company where they can pursue meaningful, lucrative careers.

Adding to this tableau of players is the continued emergence of secondary debt holders and distressed investors. During the financial crisis these investors faded somewhat from the scene, but as the recovery gels and the prospects for a quick return improve they are snapping up debt, often the fulcrum tranche of the capital structure.

4. Document Agreements. Once a company has won the necessary votes and financing to advance the prearranged bankruptcy, the company needs to properly document formal agreements. Prearranged bankruptcy filings are by their nature somewhat fluid since a third of creditors may not agree to the POR. But plan-support agreements involving the creditors that do agree can help keep the process on track. Plan-support agreements need to describe the POR, the financing terms, outline achievable goals and promises, be customized for each investor class, and include the proper disclosure requirements associated with applicable bankruptcy and security laws. These agreements help ensure that everyone remains committed to the plan.

The wild card in the prearranged bankruptcy process is that a third of creditors might not agree to the terms and won’t sign support agreements. But a well documented set of agreements with the key constituents will most likely be well received by a judge.

5. Clear Communication. Clear communications with employees, partners and investors is important so these stakeholders aren’t taken off guard or shocked by the bankruptcy plan. When employees understand a bankruptcy plan they are more likely to cooperate with management and help avoid business disruption. This continuity is crucial to maintaining the company’s competitive position and in preserving the valuation assumptions that will determine how and if the respective parties can come to agreement pre-filing. Poor communication, meanwhile, fuels gossip and creates distractions that hurt employee effectiveness and productivity. It can also lead to the exodus of talented employees.

Similarly, clear communication with suppliers and customers helps avoid business disruption. If trade partners withdraw supplies, fearing the company can’t pay for them, or if customers turn elsewhere, fearing the company won’t survive to deliver or stand behind the product it sells, the implications for the company are dire. By communicating with employees, suppliers and customers, a company can explain its plan and hopefully convince all concerned that they should continue to do business together. A coordinated communication campaign also ensures that when employees work with suppliers and customers everyone is on “the same page” and there are no miscommunications or surprises.

A prearranged bankruptcy in today’s economic and investing environment is a powerful tool to move a company through bankruptcy proceedings quickly, inexpensively, and with minimal disruption to the business. The end result can be a firm that’s leaner, adequately financed and more competitive. Not surprisingly, this requires a sophisticated financing partner, one that is experienced with prearranged bankruptcies, has the resources and expertise to finance the process, and understands the market in which the company operates. To secure such a lender, a company must manage the prearranged bankruptcy process carefully by addressing five essential elements--examine the circumstances, secure liquidity, understand the stakeholders, document agreements, and clear communication. This is a complicated, rigorous process, but well worth the effort if a stronger more competitive company can emerge.

Jim Hogan is the Senior Managing Director, GE Capital, Restructuring Finance, a leading provider of senior secured loans to distressed companies supporting Chapter 11 filings, plan-of-reorganizations, and out-of-court restructurings. Contact james.hogan@ge.com or visit gecapital.com