BANKRUPTCY Ken Bakondi Kara Brausen
Bankruptcy Defined History Statistics Chapter 11 Chapter 7 Questions?
Bankruptcy Defined Financial Distress – When cash flows are not sufficient to meet current obligations Bankrupt – When a petition is filed with one of nearly 300 Federal Bankruptcy Courts Provides Protection from Creditors Discharge of Debts
History of Bankruptcy Legislation 1789 – U.S Constitution 1800 – First U.S. Bankruptcy Law Nelson Act Chandler Act Bankruptcy Reform Act 1984 – Bankruptcy Amendment Act 1986 – Chapter 12 "family farmer/fisherman" 2005 – Consumer Protection Act
Bankruptcy Reform Act of 1978 Eliminated even numbered chapters Chapters 1,3,5 – General bankruptcy provisions Chapter 7 – Personal and Business Liquidation Chapter 9 – Municipalities (Orange County) Chapter 11 – Business Reorganizations Chapter 13 – Personal with Income Chapter 15 – Trustees for Administration Chapter 12 – Family owned farms (1986)
Consumer Protection Act 2005 Extended time between discharges Denial of discharge if the debtor received a Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case Chapter 13 instead of Chapter 7 Production of tax returns and other documents Audits Credit counseling and debtor education
Bankruptcy Statistics
Total U.S. Business Filings
Bankruptcy Statistics
Total Assets in all Publicly Traded Company Filings between 2001 and 2007? $1,023,100,000,000 Total Assets 2 largest filings of 2008? $1,018,976,000,000 2008 Total $1.16 Trillion
Largest U.S. Filings CompanyDateTotal Assets Pre-bankruptcy Lehman Brothers Holdings, Inc.9/15/2008$691,063,000,000 Washington Mutual9/26/2008$327,913,000,000 Worldcom, Inc.7/21/2002$103,914,000,000 Enron Corp.12/02/2001$65,503,000,000 Conseco Inc.12/17/2002$61,392,000,000 Chrysler4/30/2009$39,300,000,000 Thornburg Mortgage5/01/2009$36,521,000,000 Pacific Gas and Electric Co.4/6/2001$36,152,000,000 Texaco4/12/1987$34,940,000,000 Financial Corp. of America9/9/1988$33,864,000,000
General Motors, Corp.
CHAPTER 11: REORGANIZATION “intensive care”
Chapter 11: Key Process Features Voluntary petition Involuntary petition Automatic stay Exclusivity period Debtor-in-Possession financing Absolute priority rule
Chapter 11 Process 1. File petition of relief 2. Submit schedule of assets & liabilities 3. Bar date 4. Reorganization plan & disclosure statement 5. Hearing on reorganization plan 6. Vote on plan 7. Confirmation hearing 8. Set effective plan date & distribution schedule
Common Pool When individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern. Example: Firm’s Going Concern Value = $3,000,000 BV of Debt Owed = $4,000,000 Assets Liquidation Value = $2,000,000 Return as a Going Concern =.75 per $1 of loan Return if Liquidated =.50/$1 loaned
Holdout Problem When one or more of the creditors refuse to agree to reorganization terms because of the potential for larger individual recovery.
Cram-down Bankruptcy court accepts a reorganization plan for all creditors including dissenting creditor classes. Groups: Employees Consumers Federal/State/Local tax collection agencies Secured Creditors General Creditor Claims Preferred Stockholders Common Stockholders
Cram-down Scenario Proposed Plan: Employees Compensation Owed up to $2,000 ConsumersCompensation Owed up to $900 Federal/State/Local TaxesPayment Plan Structured Secured CreditorsCollateral $, 2 yr pmt plan General Creditor Claims$1000, remaining 5 yr pmt plan Preferred StockholdersIssued New Shares of Stock Common StockholdersIssued New Shares of Stock
Chapter 11 – Success/Failure
CHAPTER 7: LIQUIDATION “death”
Chapter 7 Liquidation Accounts for 65% of all business bankruptcies filed 90% of Chapter11’s end this way 85%+ of all business bankruptcies result in liquidation
Chapter 7 Liquidation Liquidation value of assets today exceeds going concern value Substantial doubt firm will continue as a going concern Prevents management from transferring assets Owners want out
Chapter 7: Liquidation Distribution of assets based on absolute priority rule 1) Administrative Costs 2) Wages/Unpaid Employee Benefits 3) Consumer Claims 4) Taxes
Chapter 7: Liquidation 5) Secured Creditors 6) Unfunded Pension Liability 7) Unsecured Creditors 8) Preferred Stockholders 9) Common Stockholders
Questions?