Week 9.ppt - Unit-3 Restructuring and Corporate Control...

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Unit-3: Restructuring and Corporate Control Financial Distress Mergers and Takeovers Liquidity and Credit Management Corporate Governance
Chapter Outline What Is Financial Distress? What Happens in Financial Distress? Bankruptcy Liquidation and Reorganization Private Workout or Bankruptcy: Which is Best? Prepackaged Bankruptcy Altman z score
What Is Financial Distress? Financial distress is a situation where a firm’s operating cash flows are not sufficient to satisfy current obligations, and the firm is forced to take corrective action. Financial distress may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors, and its equity investors.
Insolvency Stock-base insolvency: the value of the firm’s assets is less than the value of the debt. Assets Debt Equity Solvent firm Debt Assets Equity Insolvent firm Debt Note the negative equity
Insolvency Flow-base insolvency occurs when the firms cash flows are insufficient to cover contractually required payments. Contractual obligations Insolvency $ Firm cash flow Cash flow shortfall time
Largest U.S. Bankruptcies Firm Value Date Causes Pacific Gas & Electric Co $36.15 billion 2001 PG&E, California's largest utility company, fell victim to the state's electricity crisis of 2000-2001. Blackouts swept the state and costs soared, blamed in large part on California's deregulation of the energy industry in 1996—the first state to do so. Thornburg Mortgage $36.5 billion May 2009 The housing crash and credit crunch doomed the mortgage lender. Thornburg's fall demonstrated that the crisis went far beyond subprime lenders; Thornburg "specialized in making mortgages larger than $417,000 to borrowers with good credit." Chrysler $39.3 billion 2009 As the financial crisis spread to the wider economy and threatened automakers, President Obama intervened and ordered Chrysler into bankruptcy. The United Automobile Workers were given control of the company, with the federal government and Italian carmaker Fiat as minority stakeholders. MF Global $41.0 billion Oct 2011 The Jon Corzine-led brokerage became the largest American victim of the European debt crisis to date.
Largest U.S. Bankruptcies Firm Value Date Causes Conseco $61.4 billion 2002 The insurer and financial firm overaggressively acquired companies in the 90s. Its purchase of Green Tree Financial, a financier of mobile-home sales, was particularly damaging in the long run. Enron $65.5 bilion 2001 Energy giant Enron was destroyed by a giant scandal that turned it into the ultimate posterchild for outrageously fraudulent accounting practices. CIT Group $80.4 billion Nov 2009 The commercial lender was caught in the credit crunch after an "ill-fated expansion"—only to be bailed out by TARP 38 days later.

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