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1、Alternative Exit and Restructuring Strategies: Reorganization and Liquidation,What is important is not adding more years to life but more life to your years. Doug Fields,Learning Objectives,Primary Learning Objective: To provide students with an understanding of alternative strategies for failing bu
2、sinesses Secondary Learning Objectives: To provide students with an understanding of Criteria for choosing strategy for failing firms Process used to file for bankruptcy, voluntary and involuntary settlements inside and outside of court, and voluntary and involuntary liquidation,Rule of Law and Corp
3、orate Asset Allocation,The smooth functioning of capital markets requires rapid and fair resolution of disputes involving the legal rights of borrowers and lenders Studies show that borrowing costs are lower and access to credit easier in countries which enforce credit rights Total cost of financial
4、 distress (i.e., inability to meet financial obligations) includes the following: -Employee layoffs -Firm under-investment -Eroding community tax base and blight -Customer dissatisfaction with declining product quality and increasing delivery times -Delayed payments to suppliers (including lenders)
5、-Higher borrowing costs -Declining shareholder value Bankruptcy plays key role in minimizing these costs by providing a process for resolving these issues in a timely manner.,Bankruptcy,Applicable to failing firms A firm is technically insolvent if it is unable to pay its liabilities as they come du
6、e A firm is legally insolvent if a firms liabilities exceed the fair market value of its assets Designed to -Protect failing firms from lawsuits by its creditors until decision made to shut-down or continue to operate the firm -Provide creditors with an efficient means of recovering what they are ow
7、ed A firm is not considered bankrupt until it or its creditors petition the federal bankruptcy court,Voluntary Reorganization Outside of Bankruptcy Court,Generally offers best chance for owners to recover a portion of their investment Usually initiated by debtor firm by requesting relief from credit
8、ors Such relief often consists of the following: An extension: Creditors agree to lengthen period during which debtor firm can repay its debt. May also include a temporary suspension of both interest and principal repayments A composition: Creditors agree to settle for less than the full amount they
9、 are owed Debt for equity swap: Creditors surrender a portion of their claims in exchange for an ownership position in the firm,Voluntary Liquidation Outside of Bankruptcy Court,If creditors conclude insolvent firms situation cannot be reorganized, liquidation may be only course of action If insolve
10、nt firm is willing to accept liquidation and all creditors agree, legal proceedings not necessary Creditors normally prefer liquidations to avoid lengthy and costly litigation,Reorganization and Liquidation in Bankruptcy,In absence of out-of-court voluntary settlement, debtor firm may Seek protectio
11、n from creditors by petitioning the bankruptcy court or Be forced into bankruptcy by its creditors Bankruptcy allows creditor firm to stop all principal and interest payments and prevents secured creditors from taking possession of their collateral U.S. Bankruptcy Code: Chapter 11 deals with reorgan
12、ization and provides for the debtor to remain in possession, unless court rules otherwise Chapter 7 deals with liquidation and defines priority in which creditors will be paid Chapter 15 addresses insolvency issues involving assets, lenders, and other parties in various countries,Procedures for Reor
13、ganizing in Bankruptcy,Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),Pre-BAPCPA: Debtor in possession (DIP) had exclusive right for first 120 days to file a reorganization plan before creditors could submit their own plan Court could at its discretion provide extensions be
14、yond 120 days Leases could be extended indefinitely as long as payments made Post-BAPCPA: Limits DIP exclusivity period at 18 months with an additional 2 months to win creditors acceptance of reorganization plan, effectively giving DIP a maximum of 20 months before creditors can submit their plan “G
15、ood cause” lease extensions limited to 90 days Payments to management employees cannot be more than 10 times amount paid to non-management employees,Pre-Packaged Bankruptcies,Debtor negotiates reorganization plan with major creditors well in advance of filing for Chapter 11 Actual votes for a reorga
16、nization plan may already have taken place prior to the filing Subsequent Chapter 11 reorganization averages a few months as court only has to approve the plan Minority creditors may be required to accept the plan by the court Debtor may lose NOLs if out of court settlement reached in which creditors exchange their debt for equity and original shareholders own less than 50 percent of firm. In bankruptcy, debtor may claim NOLs So-called “pre-negotiated or pre-arranged bankruptcies
