The document discusses trends in corporate workouts and bankruptcies in the United States over the past two decades. Specifically, it notes that (1) the system has traditionally focused on rehabilitating troubled companies rather than liquidating them, but market forces now drive many debts into the hands of parties seeking ownership; and (2) in the 1980s, 85% of large companies entering Chapter 11 bankruptcy would undergo traditional court-supervised reorganizations, but now companies often fix their capital structure through a pre-negotiated plan before filing. It also examines the roles and incentives of various players like management, creditors, and investors in modern bankruptcy proceedings.

1. Presented By-
Yasha Singh
4113007007
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2.  Objective of the discussion is to study the trend in workouts
and bankruptcy.
 This discussion is to explore the fall issues which is being
created due to sharp widening of credit spreads and the
growing possibilities of default.
 Broader subject of this discussion is to see the major changes
in the U.S. workout and bankruptcy process that have taken
place in past two decades.
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3.  System has traditionally focused on rehabilitating and
reorganizing as opposed to liquidating troubled companies.
 Equity receivership is a process in which the control of all the
property of a large nationwide enterprise is given to
organization which are putting equity into the liquidating
troubled companies.
 This process is done for the benefits of its creditors.
 The major innovation in chapter 11 code was that creditors
could agree by a majority vote of each affected class of
creditors to allow a plan of reorganization instead of having a
strict priority tests.
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4.  Creditors seek to acquire control of the reorganization
process by buying distressed debt.
 Main feature of this new corporate solvency paradigm is that
market forces that ends up the company debts into the hands
of parties who value the firm more and want to have the
ownership and control of the company.
 This market driven process (chapter 11) has become more
prevalent than the old fashioned court-supervised
bankruptcies.
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5.  In 1980s 85% of the large companies entering chapter 11
would go through a traditional court supervised
reorganization.
◦ This process leaves the control of the organizations with the
debtors.
 In old day’s the bankruptcy filing would come out of nowhere.
 Now, situation has changed chapter 11 mainly focus on fixing
the capital structure by putting a plan that most of the
creditors have agreed to before case is filed.
 Bankruptcy judge will conduct an auction of the entire firm.
 Generally buyers prefer to acquire company inside of chapter
11 rather than outside.
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6.  Investor’s Perspective:
 There is a leakage of fee in bankruptcy process.
 When there is a greater ability to bring about changes that will
turn the company around.
 Chapter 11 is cost and time efficient as compare to traditional
methods.
 Main benefit of Chapter 11 is the ability to break contract that
no longer make sense, that are standing in the way of a viable
enterprise going forward.
 To get enough control to replace CEO and to avoid damage to
the business’s reputation by keeping it out of Chapter 11.
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7.  There are many people who are willing to do transactions
where they end up taking control.
 There are vulture investors who makes their initial investment
mainly by purchasing distressed debt.
 Such investors become active not only at time of bankruptcy
but at the first sign of financial trouble.
 Profit is not the only idea of buying distressed firm but
having hand in the turnaround of the company.
 In the bankruptcy process there are mainly three players:
management, the senior creditors and the junior creditors.
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8.  The management and the senior creditors want the firm in
the bankruptcy to be valued as low as possible.
 In this way nothing will be left for the junior creditors and so
they have no claim on the business.
 Firm favors such low valuations because this gives them
heroic look after they emerges from bankruptcy.
 On the other hand junior creditors want firms to be valued at
high so that there’s a lot left over for them.
 But sometimes senior creditors delays or even block the sale
of the firm under Chapter 11 so that they can acquire them.
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9.  Companies with covenant-lite structure will delay their
restructuring. They will use Chapter 11 and DIP financing to
keep themselves afloat until they can restructure.
 Company will be in worst shape when investor will get a role
to play. As a result it be more difficult and time consuming.
 Combination of covenant lite with second lien securities will
be a problem.
 At the time of the bankruptcy proceedings it is less likely that
the value of the enterprise will cover the full amount of
secured loans.
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10.  CLOs and CDOs are shell entities governed under a trust
indenture.
 These are not the value maximizing hedge funds. There main
incentive is to receive cash as early as possible.
 Voting rights and obligations of the holder is not known.
 Trusts are run by professional money managers that often
have no ownership in the entities.
 This means that holdings are controlled by agents whose
decisions may not be the same as investors.
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11.  Distressed companies will workout the details of the
reorganization plan before going into Chapter 11.
 There will be more liquidity in the distressed debt market,
because of that value of the firm can be determined more
readily.
 Bankruptcy process that is open to the prospect of a sale to a
third party is beneficial even if no sale ever happens.
 Vulture investing will be benefiting.
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