SoftBank-funded construction startup Katerra filed for Chapter 11 bankruptcy this week in the Southern District of Texas, leaving numerous projects unfinished, between $500 million to $1 billion in assets, and $1 billion to $10 billion in liabilities. The company blamed its downfall on a number of factors in a recent statement, including financial hardship from the pandemic and "unexpected insolvency proceedings of Katerra's former lender." The lender, Greensill Capital, another SoftBank-backed entity, reportedly filed for insolvency in London in March.
The company does not plan to reorganize in the traditional sense through Chapter 11 bankruptcy, said Andrew Behlmann, partner at Lowenstein Sandler LLP (New York, NY). "When most people think of Chapter 11, they think these people will be coming out of it, but that's not necessarily the case," he added. "A few days before filing bankruptcy, Katerra sent some project owners a letter indicating that it is ceasing operations and would be doing no further work on their projects. On its first day in bankruptcy, Katerra filed a series of motions to reject the prime contracts for a number of projects and announced that it is conducting an expedited sale process for the remainder of its business. In a few months, Katerra will no longer exist in its current form."
Overall, it sounds like Katerra grew too large, too fast, and took on too much debt. It's not an uncommon story. Creditors should consult with their management and legal counsel for how to proceed, but here are some steps you may want to consider when any debtor files for bankruptcy.
Bruce Nathan, partner at Lowenstein Sandler LLP (New York, NY), said the odds of any cash flowing down to unsecured creditors is very slim in this case. "As an unsecured creditor, they won't see much recovery," he said. "Your best chance is to look at liens in their state to try and collect on their claim."
Some of the best actions that creditors can take to protect themselves is actually done before a debtor ever files bankruptcy. Credit analysts may have been able to see the red flags months ago if they were running credit reports on an ongoing basis.
A mechanic's lien also should have been filed ahead of time, said Chris Ring, of NACM Secured Transaction Services. "Now that the Chapter 11 bankruptcy is filed, some statutes will bar you from filing a mechanic's lien at this point," he said. "If credit managers didn't do the preemptive things first, now that the bankruptcy is filed, they may be facing a pretty bad write-off."
If you have a profitable project, it's possible whoever buys Katerra may want to continue, which would increase your chances of repayment. However, it would "take creative thought on the side of the project owners to make that happen," Behlmann added. Some project owners reportedly have taken over their projects, presumably utilizing the termination provisions in their prime contracts to remove Katerra as construction manager and (perhaps more importantly from a subcontractor's standpoint) directly assume agreements with subcontractors.
Katerra said it would try to "maximize value for its stakeholders." The company has secured commitments for $35 million in debtor-in-possession (DIP) financing from SB Investment Advisers (UK) Limited, another SoftBank affiliate, to fund operations during the Chapter 11 process, according to the statement.
Registrants of NACM's 2021 Credit Congress & Expo Virtual Plus event can still view Jason Torf, Esq., Ice Miller LLP's session, Tips to Assess a Bankruptcy Case, until June 30.
-Annacaroline Caruso, editorial associate