1. Stock Market Analysis and Personal Finance Mr. Bernstein Bankruptcy and Distressed Securities May 28, 2014

2. Stock Market Analysis & Personal Finance Mr. Bernstein Importance of Bankruptcy Laws Sound Bankruptcy Laws promote risk-taking in an economic system by clarifying potential outcomes Business owners have a path to a restart Creditors understand the process for distributing remaining assets of a failed business The US Constitution specifically grants Congress exclusive power to establish Bankruptcy Laws 2

3. Stock Market Analysis & Personal Finance Mr. Bernstein Bankruptcy Laws Chapter 11: Reorganization of Businesses Used primarily by corporations Litigation and debt collection against business is placed on hold Plan is created for dispensing some obligations and redistributing remaining assets, often with the business entity continuing operations with a prospect of profitability going forward Plan is voted on by various creditors 3

4. Stock Market Analysis & Personal Finance Mr. Bernstein Bankruptcy Laws Chapter 11: Reorganization of Businesses Allows continuation of operations while a restructuring of finances is designed and implemented. Provides an orderly process which gives potential lenders or investors greater comfort to work with higher-risk businesses. Allows restructuring of businesses in a way which is less disruptive to employees and other stakeholders. 4

5. Stock Market Analysis & Personal Finance Mr. Bernstein Rationale for Bankruptcy Chapter 11 $$ Value of a business reorganized into a going concern > $$ Value of sum of parts liquidated individually Some goodwill may exist in business franchise even if it cannot pay its bills More value is therefore available to pay creditors 5

6. Stock Market Analysis & Personal Finance Mr. Bernstein Distressed Securities Stocks, bonds or other securities of companies that are in or near default or reorg Standard fundamental analysis is difficult Assessments of potential bankruptcy outcomes are a major factor Greater uncertainties = higher risk/higher return 6

7. Stock Market Analysis & Personal Finance Mr. Bernstein Distressed Securities and Yields Investment Grade: KO 3.30% of 9/01/21 Yield to Maturity is 2.09%, 60 bps over Tsys High Yield: DAL 4.95% of 5/23/19 Yield to Maturity is 3.48%, 215 bps over Tsys Distressed: STP 3.00% of 5/15/13 Price: 30.5 cents on the dollar 7