On the eve of bankruptcy, American companies shower executives with bonds

(Reuters) – Nearly a third of the more than 40 large companies seeking bankruptcy protection in the United States during the coronavirus pandemic awarded bonuses to executives within a month of presenting their cases, according to a Reuters analysis of the statements. of securities and court records.

Under a bankruptcy law of 2005, companies are prohibited, with few exceptions, from paying retention bonuses to executives while bankrupt. But companies took advantage of a loophole by granting payments before filing it.

Six of the 14 companies that approved bonds within a month of their presentations cited the business challenges executives faced during the pandemic to justify compensation.

Even more companies paid bonds in the half-year period before their bankruptcies. Thirty-two of the 45 companies that Reuters reviewed approved or paid bonds within six months of filing. Almost half of authorized payments within two months.

Eight companies, including JC Penney Co Inc and Hertz Global Holdings Inc, approved bonds just five days before seeking bankruptcy protection. Hi-Crush Inc, a provider of oil and gas fracking sand, paid executive bonds two days before its presentation on July 12.

JC Penney, forced to temporarily close its 846 department stores and leave some 78,000 of its 85,000 employees without permission as the pandemic spread, approved nearly $ 10 million in payments just before its presentation on May 15. On Wednesday, the company said it would permanently close 152 stores and lay off 1,000 employees.

The company declined to comment for this story, but said in a previous statement that the bonuses were aimed at retaining a “talented management team” that had made progress on a change before the pandemic.

The other companies declined to comment or did not respond. In the presentations, many said that the economic crisis had made traditional compensation plans obsolete or that executives who obtained bonds had lost other compensation.

Luxury retailer Neiman Marcus Group temporarily closed all 67 stores in March and laid off more than 11,000 employees in April. The company paid $ 4 million in bonuses to President and CEO Geoffroy van Raemdonck in February and more than $ 4 million to other executives in the weeks leading up to his bankruptcy filing on May 7, court records show. Neiman Marcus scrutinized this week about a plan he proposed after filing for bankruptcy to pay additional bonuses to executives. The company declined to comment.

Hertz, which recently laid off more than 14,000 workers, paid bonuses for top executives of $ 1.5 million days before their May 22 bankruptcy, in part to acknowledge the uncertainty they faced from the pandemic’s impact on travel, the company said. company in a document.

Whiting Petroleum Corp awarded $ 14.6 million in additional compensation to executives days before their April 1 bankruptcy. Shale pioneer Chesapeake Energy Corp awarded $ 25 million to lower-level executives and employees in May, about eight weeks before filing for bankruptcy. Both cited the consequences of the pandemic and the oil price war between Saudi Arabia and Russia, which they said made their incentive plans ineffective.

Reuters reviewed the financial statements and court records of 45 companies that filed for bankruptcy between March 11, the day the World Health Organization declared COVID-19 a pandemic, and July 15. Reuters reviewed companies with shares or public debt and more than $ 50 million in liabilities.

Such bonuses have long raised objections that companies enrich executives while cutting jobs, weakening creditors, and eliminating stock investors. In March, creditors sued former Toys ‘R’ Us executives and directors, charging them with crimes that included the payment of management bonuses days before their 2017 bankruptcy. The retailer was liquidated in 2018, ending with more than 31,000 people. .

An attorney for the executives and directors said the bonuses were justified, given the extra work and stress on management, and that Toys ‘R’ Us had hoped to remain in business after the restructuring.

In June, Democrats in Congress responded to the pandemic-induced wave of bankruptcies by introducing legislation that would strengthen creditors’ rights to recover bonds. The bill, the latest version of a proposal that has long failed to gain traction, faces little prospect in a Republican-controlled Senate, a Democratic aide said.

Companies that pay bonds before bankruptcy know they would face scrutiny in court about the proposed compensation after their filings, said Clifford J. White III, director of the US Trustees Program, a division of the Department of Justice. charged with overseeing bankruptcy proceedings. But trustees have no power to stop bonuses paid even days before a company’s bankruptcy filing, he said, allowing companies “to escape transparency and judicial review.”

DODGING BONUS RESTRICTIONS

The 2005 legislation required executives and other corporate experts to have a competitive job offer before receiving retention bonuses during bankruptcy, among other restrictions. That forced bankrupt companies to come up with new ways to pay the bonds, according to some restructuring experts.

After the 2008 financial crisis, companies often proposed bonuses in bankruptcy court, viewing them as incentive plans with goals that executives must meet. The judges mostly approved the plans, ruling that performance benchmarks put compensation beyond the scope of restrictions on retention bonds. The plans, however, raised objections from Justice Department supervisors who called them disguised retention bonds, often with easy milestones.

Finally, the companies discovered that they could avoid scrutiny entirely by approving bonds before filing for bankruptcy. Dozens of companies have approved such payments in the past five years, said Brian Cumberland, executive compensation expert at consulting firm Alvarez & Marsal, who advises companies undergoing financial restructuring.

The companies argue that the bonds are crucial in retaining executives whose departures could torpedo their business, ultimately leaving less money for creditors and employees. Now, some companies reinforce those arguments by claiming that their businesses would not have collapsed without the economic crisis of the pandemic.

Pre-bankruptcy payments are necessary, the companies say, because potential stock awards are worth nothing and it would be impossible for executives to meet business goals that were drawn up before the economic crisis. The bonuses ensure the leadership stability needed to keep wavering operations together.

Some specialists argue that bonuses are difficult to justify for executives who may have few better job options in an economic crisis.

“With double-digit unemployment, it is a strange time to pay retention bonds,” said Adam Levitin, a bankruptcy professor at Georgetown University law school.

CLOSED STORES, BIG BONUSES

JC Penney has not posted an annual profit since 2010 as he has struggled to cope with the switch to online shopping and competition from discount retailers. The 118-year-old chain, at various points, employed more than 200,000 people and operated 1,600 stores, figures that have since shrunk by more than half.

On May 10, the JC Penney board approved compensation changes that paid top executives, including CEO Jill Soltau, nearly $ 10 million. On May 13, Soltau received a long-term incentive payment of $ 1.7 million and a retention bonus of $ 4.5 million, court filings show.

The company’s median employee annual pay, a part-time hourly worker, was $ 11,482 in 2019, a company filing shows.

JC Penney filed for bankruptcy two days after paying the Soltau bonds. At a hearing the next day, a creditors’ attorney argued that the payments were designed to thwart judicial review. The payments were timed “so they didn’t have to put it in front of you,” said attorney, Kristopher Hansen, addressing US bankruptcy judge David Jones.

Jones, who also oversees the Whiting Petroleum, Chesapeake Energy and Neiman Marcus cases, told Reuters such bonds are “always a concern” in bankruptcy cases. “That said, the confrontation process requires the parties to present the problem to me before I can take action,” he added, stressing that he was speaking of general dynamics applicable to any case. “A comment made while passing a lawyer is not enough.”

In his statement earlier this year, JC Penney said the bonds were among a series of “difficult and prudent decisions” made to safeguard the future of the company.

Dennis Marten, a shareholder who said he once worked at a JC Penney store, disagrees. He has appeared in court hearings calling for an investigation into the company’s leadership.

“What a shame to have the nerve to get that money,” he said of Soltau.