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Correction to This Article
This article incorrectly said that BearingPoint shares had been delisted from the New York Stock Exchange. The company's stock has been suspended from trading but has not been delisted, pending an appeal.
Consultancy Seeks Release From Debt Trap

By Michael S. Rosenwald
Washington Post Staff Writer
Monday, January 12, 2009

In April 2005, just days after telling investors that federal regulators were investigating its accounting practices amid a significant cash crunch, BearingPoint borrowed $200 million from a consortium of lenders.

The McLean management and IT consulting firm, which was sputtering after being spun off from KPMG, needed the money because it had used operating funds as collateral for other letters of credit. Company officials hoped the deal would reassure clients. BearingPoint stock jumped 9.5 percent on the news.

But now that deal is casting a cloud over the company. According to regulatory filings, BearingPoint agreed that on April 15 of this year that the lenders can either convert the debt into stock or be paid back the entire principal. With BearingPoint's stock delisted from the New York Stock Exchange after trading for pennies, the first option is unlikely. Last year, the firm told investors, "We currently expect most, if not all, of these debentures to be tendered for payment at that time."

BearingPoint finds itself in this jam after years of accounting and infrastructure problems -- the sort many companies pay hefty fees for BearingPoint's own consultants to help solve for them. In an effort to right itself, the firm has cycled through management, slashed jobs and even hired a consulting company at $750 an hour. Now BearingPoint is facing a severe recession and the prospect that customers could cut back.

"I am keenly aware that we have much left to do in a short period of time," BearingPoint chief executive Ed Harbach told investors in November amid signs that the firm's business was picking up steam, posting an operating profit for the third straight quarter and adding clients such as Time Warner and the Maryland Department of Human Resources. BearingPoint lost $35.2 million for the first nine months of 2008, down from a $194 million loss in the comparable period a year before.

The company is under pressure to complete a turnaround. In a sign of the grim circumstances, all Wall Street analysts following the firm have cut off coverage. Moody's recently downgraded BearingPoint's credit rating, which was already in junk status, citing the company's inability to generate enough operating free cash flow, weakness in several business lines and the debt payment situation coming in April. Following a recent reverse stock split, BearingPoint shares trade for less than $2 on the Over the Counter Bulletin Board.

Despite those problems, BearingPoint has reported record client bookings in its public-sector business, and the division has retained all of its top 50 clients. International results are improving. The voluntary attrition rate of employees has decreased. And expenses are down. The Moody's analyst who downgraded BearingPoint's credit noted that the firm "improved its recent financial performance relative to last year."

BearingPoint senior executives declined to answer questions for this article, saying they were in a quiet period while working on their fourth-quarter and year-end results. Officials from the firm's largest shareholder, hedge fund Glenview Capital, run by the brash Larry "L-Train" Robbins, did not return calls seeking comment. But a close reading of BearingPoint's filings with the Securities and Exchange Commission paint a picture of a firm racing to come up with solutions despite limited options, particularly regarding the April debt issue.

The major difficulty with the potential $200 million debt payment, if the lenders execute this option, is whether BearingPoint would have enough cash left to operate. As of Sept. 30, the firm had $333 million, according to SEC filings. However, BearingPoint has also told investors that it needs $150 million to $200 million to run the business, though that number could be reduced by making different payment arrangements for operational expenses. Also, the company has over the years tended to start the new year with its largest cash reserves.

One option would be to quickly raise cash by selling off assets, analysts said. But according to terms of a $500 million credit facility signed in 2007, BearingPoint needs to use any proceeds to first pay down debt related to that arrangement. In SEC filings, BearingPoint has acknowledged the tight circumstances, saying that "Our 2007 Credit Facility imposes a number of restrictions on the way in which we operate our business and may negatively affect our ability to finance future needs, or do so on favorable terms."

There are two other options: sell the company or renegotiate the debt.

BearingPoint has for months said it is pursuing a sale or merger, hiring investment bank Greenhill & Co. as an adviser. The recent economic downturn and credit crunch has soured those plans, though. In a recent SEC filing, BearingPoint said the bearish economic climate had caused interested companies to either pull out of the process or submit prices that were too low. BearingPoint has a market capitalization of $7 million. Accenture, its biggest competitor, is worth more than $20 billion.

The company said it recently directed Greenhill to pursue the second option, renegotiating the company's debt or exchanging it for equity -- a strategy, analysts have pointed out, that could significantly dilute ownership stakes for existing shareholders. It is employing restructuring firm AlixPartners to help come up with an operating plan for this year. BearingPoint named AlixPartners managing director Kenneth A. Hiltz as its chief financial officer. His expertise is in cash management and debt restructuring.

"While it's too early to make a definitive forecast, I feel very comfortable that we will have enough cash to allow us to work through the next couple of quarters as we focus, almost exclusively, on cash and other balance sheet improvements," Hiltz said after his appointment in November.

Meanwhile, BearingPoint is trying to clean up its accounting issues. The firm is working to implement new financial reporting systems for North America. In 2005, BearingPoint's audit committee said the implementation of a previous accounting system "was attempted without adequate testing and training or sufficient backup capability," causing the firm to not file timely SEC reports and increasing finance and accounting costs.

"For so long as we are unable to implement and operate our new North American financial system, we will continue to experience a higher than normal probability of the occurrence of these types of risks," BearingPoint said in recent regulatory filings.

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