第三十一章 财务困境.pptx
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第三十一章 财务困境.pptx
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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,Notethenegativeequity,Insolvency,Flow-baseinsolvencyoccurswhenthefirmscashflowsareinsufficienttocovercontractuallyrequiredpayments.,Contractualobligations,Insolvency,$,Firmcashflow,Cashflowshortfall,time,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.Thefirmandmostofitscreditorsagreetoprivatereorganizationoutsidetheformalbankruptcy.Aftertheprivatereorganizationisputtogether(prepackaged)thefirmfilesaformalbankruptcyunderChapter11).Themainbenefitisthatitforcesholdoutstoacceptabankruptcyreorganization.Offersmanyoftheadvantagesofaformalbankruptcy,butismoreefficient.,31.6SummaryandConclusions,Financialdistressisasituationwhereafirmsoperatingcashflowisnotsufficienttocovercontractualobligations.Financialrestructuringcanbeaccomplishedwithaprivateworkoutorformalbankruptcy.CorporatebankruptcyinvolvesChapter7liquidationorChapter11reorganization.AnessentialfeatureoftheU.S.Bankruptcycodeistheabsolutepriorityrule(APR).Ahybridofaprivateworkoutandformalbankruptcyisprepackagedbankruptcy.,
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