Surety bond producers can provide important communication in bankruptcy scenarios, experts say

By Martha L. Perkins posted 05-02-2014 01:17 PM

  

A surety bond producer plays a valuable communications role when a bonded company is going through bankruptcy proceedings, according to experts who participated in a commercial surety claims panel at the NASBP Annual Meeting on Tuesday.

“The surety bond producer can be very helpful to both the surety and the bonded principal where the bonded principal faces bankruptcy, by facilitating communication between both the principal and the surety and ultimately the principal and its bank,” Armen Shahinian of the law firm Wolff & Samson said in an interview last week. He served as the moderator of Tuesday's panel.

Part of the producer's efforts to aid communication involves an educational process “so that the principal knows the bond isn’t a traditional form of insurance policy and is not treated like an insurance policy upon a bankruptcy filing,” Shahinian said. “Rather, it’s treated like an extension of credit, and the debtor does not have a right to continue to rely on bonds after filing for bankruptcy without the consent of the surety. In order to induce the surety to give such consent, the debtor may offer the surety the benefit of a surety program order allowing administrative claim status with respect to any losses surety pays on post-petition claims under its bonds. This status can apply to pre-petition bonds and will assure the surety of repayment if the reorganization is successful.”

An example of how a surety can successfully facilitate communication is that of Synagro Technologies. The company reorganized under Chapter 11 bankruptcy protection beginning in April 2013, said Joe Page, who was the company's general counsel at the time and spoke on Tuesday's panel. The company was sold while in bankruptcy and “kept the entire surety base intact” through the conclusion of that transaction, he said in an interview on Monday.

The company had a healthy baseline business of municipal contracting, involving waste management and recycling, but debt obligations were coming due last year, Page said. Because Synagro was involved in municipal procurement, it frequently needed bonds.

“Having bonding capacity was a key strength for the company, and keeping it stable was critical going through restructuring,” he said. “If underwriters had gotten nervous and called for additional collateral or called the bonds and required [the company] to replace or put full letter of credit up or quit writing bonds while in the restructuring process, it would have been crippling to the company,” he said.

The company's broker, Aon, was key in ensuring the situation remained stable by remaining in regular, transparent communication with the underwriting partners involved in the process, he said. That kept everyone confident that Synagro could restructure without putting the bonds at risk.

Synagro emerged from Chapter 11 bankruptcy protection in August and the sureties suffered no losses.

Tuesday's panel also included the Aon surety broker and Ace surety underwriters who were involved in the company's bonding process through bankruptcy proceedings.

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