第三十一章 财务困境

ExecutiveSummary,Thischapterdiscussesfinancialdistress,privateworkouts,andbankruptcy.Afirmthatdefaultsonarequiredpaymentmaybeforcedtoliquidateitsassets.Moreoften,adefaultingfirmwillreorganize.Financialrestructuringinvolvesreplacingoldfinancialclaimswithnewonesandtakesplacewithprivateworkoutsorlegalbankruptcy.,ChapterOutline,31.1WhatisFinancialDistress?31.2WhatHappensinFinancialDistress?31.3BankruptcyLiquidationandReorganization31.4PrivateWorkoutorBankruptcy:WhichisBest?31.5PrepackagedBankruptcy31.6SummaryandConclusions,31.1WhatisFinancialDistress?,Asituationwhereafirmsoperatingcashflowsarenotsufficienttosatisfycurrentobligationsandthefirmisforcedtotakecorrectiveaction.Financialdistressmayleadafirmtodefaultonacontract,anditmayinvolvefinancialrestructuringbetweenthefirm,itscreditors,anditsequityinvestors.,Insolvency,Stock-baseinsolvency;thevalueofthefirmsassetsislessthanthevalueofthedebt.,Debt,Insolvency,Flow-baseinsolvencyoccurswhenthefirmscashflowsareinsufficienttocovercontractuallyrequiredpayments.,Firmcashflow,TheLargestU.S.Bankruptcies,31.2WhatHappensinFinancialDistress?,Financialdistressdoesnotusuallyresultinthefirmsdeath.FirmsdealwithdistressbySellingmajorassets.Mergingwithanotherfirm.Reducingcapitalspendingandresearchanddevelopment.Issuingnewsecurities.Negotiatingwithbanksandothercreditors.Exchangingdebtforequity.Filingforbankruptcy.,WhatHappensinFinancialDistress,Financialdistress,Source:KarenH.Wruck,“FinancialDistress:ReorganizationandOrganizationalEfficiency,”JournalofFinancialEconomics27(1990),Figure2.SeealsoStuartC.Gilson;KoseJohn,andLarryN.P.Lang,“TroubledDebtRestructurings:AnEmpiricalStudyofPrivateReorganizationinFirmsinDefaults,”JournalofFinancialEconomics27(1990);andLawrenceA.Weiss,“BankruptcyResolution:DirectCostsandViolationofPriorityClaims,”JournalofFinancialEconomics27(1990).,ResponsestoFinancialDistress,Thinkofthetwosidesofthebalancesheet.AssetRestructuring:Sellingmajorassets.Mergingwithanotherfirm.ReducingcapitalspendingandR&Dspending.FinancialRestructuring:Issuingnewsecurities.Negotiatingwithbanksandothercreditors.Exchangingdebtforequity.Filingforbankruptcy.,31.3BankruptcyLiquidationandReorganization,Firmsthatcannotmeettheirobligationshavetwochoices:liquidationorreorganization.Liquidation(Chapter7)meansterminationofthefirmasagoingconcern.Itinvolvessellingtheassetsofthefirmforsalvagevalue.Theproceeds,netoftransactionscosts,aredistributedtocreditorsinorderofpriority.Reorganization(Chapter11)istheoptionofkeepingthefirmagoingconcern.Reorganizationsometimesinvolvesissuingnewsecuritiestoreplaceoldones.,BankruptcyLiquidation,StraightliquidationunderChapter7usuallyinvolves:Apetitionisfiledinafederalcourt.Thedebtorfirmcouldfileavoluntarypetitionorthecreditorscouldfileaninvoluntarypetitionagainstthefirm.Atrustee-in-bankruptcyiselectedbythecreditorstotakeovertheassetsofthedebtorfirm.Thetrusteewillattempttoliquidatethefirmsassets.Aftertheassetsaresold,afterpaymentofthecostsofadministration,moneyisdistributedtothecreditors.Ifanymoneyisleftover,theshareholdersgetit.,BankruptcyLiquidation:PriorityofClaims,Thedistributionoftheproceedsofliquidationoccursaccordingtothefollowingpriority:Administrationexpensesassociatedwithliquidation.Unsecuredclaimsarisingafterthefilingofaninvoluntarybankruptcypetition.Wagesearnedwithin90daysbeforethefilingdate,nottoexceed$2,000perclaimant.Contributionstoemployeebenefitplansarisingwith180daysbeforethefilingdate.Consumerclaims,notexceeding$900.Taxclaims.Securedandunsecuredcreditorsclaims.Preferredstockholdersclaims.Commonstockholdersclaims.,APRExample,SupposetheB.O.DrugCo.decidestoliquidateunderChapter7.Assumethattheliquidationvalueis$2.7million.Bondsworth$1.5millionaresecuredbyamortgageonthecorporateheadquartersbuilding,whichissoldfor$1million.$200,000isusedtocoveradministrativecostsandotherclaimsafterpayingthis,$2.5millionisavailabletopaycreditors.Theonlyproblemisthattheunpaiddebtis$4million.,APRExample,UnderAPR,allcreditorsarepaidbeforeshareholders,andthemortgagebondholdersarefirstinline.Thetrusteeproposesthefollowingdistribution:,BankruptcyReorganization:Chapter11,Atypicalsequence:Avoluntarypetitionoraninvoluntarypetitionisfiled.Afederaljudgeeitherapprovesordeniesthepetition.Inmostcasesthedebtorcontinuestorunthebusiness.Thefirmisgiven120daystosubmitareorganizationplan.Creditorsandshareholdersaredividedintoclasses.Requiresonlyapprovalby1/2ofcreditorsowning2/3ofoutstandingdebtAfteracceptancebythecreditors,theplanisconfirmedbythecourt.Paymentsincash,property,andsecuritiesaremadetocreditorsandshareholders.,ReorganizationExample,SupposetheB.O.DrugCo.decidestoreorganizeunderChapter11.Assumethatthe“goingconcern”valueis$3millionanditsbalancesheetisshown.,ReorganizationExample,Thefirmhasproposedthefollowingreorganizationplan:,ReorganizationExample,Andadistributionofnewsecuritiesunderanewclaimwiththereorganizationplan:,AbsolutePriorityRuleinPractice,ReasonsforAPRViolations,Creditorswanttoavoidtheexpenseoflitigation.Debtorsaregivena120-daywindowofopportunitytocausedelayandharmvalue.Managersoftenownequityanddemandtobecompensated.Theyareinchargeforatleastthenext120days.Bankruptcyjudgeslikeconsensualplans(theydontclogthecourtcalendarwithappeals)andpressurepartiestocompromise.,Vultures,“Vultures”aremoneymanagersthatspecializeinthesecuritiesofdistressedanddefaultedcompanies.Therearebetween50and60institutionvulturespecialists,activelymanagingover$25billionin1998.Distresseddebtinvestorshavetargetannualratesofreturnof2025percent.Althoughsomeyearsarebetterthanothers,theoverallannualrateofreturnfrom1978-1997hasbeenabout12percentsimilartojunkbondsbutlessthanthestockmarket.,31.4PrivateWorkoutorBankruptcy:WhichisBest?,Bothformalbankruptcyandprivateworkoutsinvolveexchangingnewfinancialclaimsforoldfinancialclaims.Usuallyseniordebtisreplacedwithjuniordebtanddebtisreplacedwithequity.Whentheywork,privateworkoutsarebetterthanaformalbankruptcy.Complexcapitalstructuresandlackofinformationmakeprivateworkoutslesslikely.,31.4PrivateWorkoutorBankruptcy:WhichisBest?,AdvantagesofBankruptcyNewcreditisavailable-debtorinpossessionorDIPdebt.Discontinuedaccrualofinterestonpre-bankruptcyunsecureddebt.Anautomaticstayprovision.Taxadvantages.Requiresonlyapprovalby1/2ofcreditorsowning2/3ofoutstandingdebt.DisadvantagesofBankruptcyAlongandexpensiveprocess.Judgesarerequiredtoapprovemajorbusinessdecisions.Distractiontomanagement.“Holdout”bystockholders.,31.5PrepackagedBankruptcy,PrepackagedBankruptcyisacombinationofaprivateworkoutandlegalbankruptcy.Thefirmandmostof