Bondholders Seek $21.5 Million in Damages From BearingPoint Default

Plaintiffs who won a bond default ruling against BearingPoint Inc. last week said that they aren't trying to ruin the company and that they don't think the $21.5 million in damages they have requested will hurt the McLean consulting firm's business.

A group of bondholders sued BearingPoint for failing to file up-to-date financial reports -- a violation of the bond agreement that has become a common tool used by creditors and most typically hedge funds to extract concessions. A New York court last week agreed that the firm was in default on about $200 million in corporate debt.

Hareesh Paranjape, portfolio manager at New York-based Fore Advisors L.P. and one of three hedge fund managers who instigated the lawsuit, said he's only trying to make the company meet its obligations.

"The company is not in financial distress," Paranjape said. "Of course, it is just a technical default. But they breached the covenants [of the bonds]. We wanted the damages due to us as a result of that breach. I think it's ludicrous that a $1.7 billion market-cap company thinks that a relatively small damage claim would put them in financial distress."

He said that usually in such cases, companies settle with the bondholders and move on. "BearingPoint for whatever reason did not concede an inch, and now they're paying the price," he said.

BearingPoint officials have appealed the court ruling and asked other creditors to grant waivers to avoid similar suits. The company said it would delay filing its annual report, expected tomorrow, because of the uncertainty that the court ruling has produced for the company.

BearingPoint's stock closed yesterday at $7.78, down more than 8 percent.

Chief executive Harry L. You yesterday criticized the creditors who brought the suit, saying hedge funds who file this sort of litigation are preying on technicalities to boost their return.

"All the people we've talked to outside the plaintiffs are being very rational about this," You said. "This is just a group of people who've made some money suing people on this technicality."

BearingPoint has not filed timely financial statements in more than two years after inheriting accounting and other problems from when it was part of KPMG LLP. BearingPoint was spun off from KPMG and provides management and information-systems consulting for large corporations and government agencies. In 2005, a new management team, including You, took over, and the firm was "ahead of schedule on its turnaround," said Adam Frisch, an analyst with UBS AG.

"It's unfortunate that this has to overshadow the improvements," he said.

Some analysts agreed that BearingPoint would be able to weather this problem without seeking bankruptcy protection.

But the court ruling still poses risks. Other creditors could use the default judgment to pursue their own payment demands, for example. It could also spook potential clients and prompt existing customers to consider canceling contracts, said Ivan Feinseth, an analyst with Matrix USA LLC.

"How do you advise others when your own house is not in order?" he said. "I don't think bankruptcy is imminent, but they'll have to do some kind of restructuring" of their debt.

You said bankruptcy is not in the cards, though credit-rating agency Egan-Jones Ratings Co. said yesterday that a bankruptcy protection filing remains a possibility.

"The company needs to be watched," Egan-Jones said in a written analysis released yesterday.

Despite its creditor problems, BearingPoint says its revenue has been growing, and it has $291 million in cash on hand. The company warned in its SEC filing, however, that it probably wouldn't be enough to fund its operations should its creditors start submitting "sudden, unexpected significant demands for cash collateral or for accelerated payment of principal and accrued interest."

Revenue for 2005 was $2.40 billion, about a 2 percent increase over 2004, You said yesterday. The company expects to report a loss of $650 million to $720 million for 2005, at least $100 million more than it lost in 2004.

Moody's said yesterday that it had a B1 rating on BearingPoint's corporate debt, a rating it assigns to speculative corporate bonds with relatively high probability of default and loss. Moody's also said its BearingPoint rating "may be under review."