week4A - Bankruptcy and Financial Distress Thomas H. Noe...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Bankruptcy and Financial Distress Thomas H. Noe
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture objectives Understand The basic legal framework for corporate financial distress and bankruptcy How the legal framework generates opportunities for strategic maneuver by the shareholders of a bankrupt firm How the bankruptcy/financial distress system affects the incentives of managers and shareholder of non- bankrupt firms.
Background image of page 2
Basic Definitions Financial Distress : shareholders find it difficult or impossible to satisfy creditor claims. illiquidity(IL)-- firm value >> nominal debt value, but cash flow to small to cover contracted payments to creditors financial insolvency-(FI)-- firm value <= nominal debt value. economic failure-(EF) --value maximized by firm liquidation.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Consequences of Distress In a perfect financial market economic failures will be liquidated, economically viable firms will will be able to borrow more w/o restructuring if they are illiquid but not insolvent will reorganize their capital structures and continue operations if they are insolvent .
Background image of page 4
Consequences of Distress Unfortunately, markets are imperfect, because of Free-rider problem ---each creditor wants the other creditor to make concession Differences in information ---if shareholders feel debtholders will restructure their debt if they claim distress, the have an incentive to “cry wolf” Creditor myopia ---each creditor on see the effect of policy decisions on her own claim, not total enterprise value Therefore, distress resolution is imperfect
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Reduce inefficiency state imposed agreement Possible approaches? auctions coordinated foreclosure structured negotiations
Background image of page 6
Two approaches: U.S/U.K. ca. 1985-1990 US: equity receivership UK: debtor asset foreclosure UK formal procedure approaches US US practice approaches UK Pro-debtor Pro-creditor time
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Financial Distress US Law Bankruptcy--Formal legal procedure for resolving financial distress. Chapter 7--liquidation Chapter 11--reorganization Workout/Reorganization--Informal procedures for resolving financial distress.
Background image of page 8
U. S. Principles Principles underlying Chpt. 11 Bankruptcy Automatic Stay current shareholders become ‘‘debtors-in- possession,” assets protected from seizure, right to make first reorganization proposal. Automatic Approval class which is paid in full is presumed to consent to reorganization
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
U. S. Principles Absolute Priority --if agreement cannot be reached, court imposed settlement (cram down) must satisfy absolute priority no payoff to any class unless all classes with higher priority are paid in full. Lifting of stay ---if a class cannot possibly receive any payment in any negotiated settlement consistent with absolute priority, that class cannot block settlement.
Background image of page 10
U. S. Principles Transparency ---all creditor classes have a right to a full accounting of the assets and liabilities of the debtor-in-possession.
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
U. S. Strategic Bankruptcy Shareholders can use the automatic
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/10/2008 for the course FINC 732 taught by Professor Noe during the Spring '08 term at Tulane.

Page1 / 46

week4A - Bankruptcy and Financial Distress Thomas H. Noe...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online