Bankruptcy, Reorganization, and Liquidation

‡ Financial distress process ‡ Federal bankruptcy law (Undang-undang No. 37 ‡ Reorganization ‡ Liquidation

tentang Kepailitan dan Penundaan Kewajiban Pembayaran Utang)

What are the major causes of business failure?
‡Economic factors
± industry weakness ± poor location/product

‡Financial factors
± too much debt ± insufficient capital

Most failures occur because a number of factors combine to make the business unsustainable.

. but the number in any one year has never been a large percentage of the total business population. ‡ The failure rate of businesses has tended to fluctuate with the state of the economy.Do business failures occur evenly over time? ‡ A large number of businesses fail each year.

‡ Large firms tend to get more help from external sources to avoid bankruptcy. . given their greater impact on the economy. large or small. is more prone to business failure? ‡ Bankruptcy is more frequent among smaller firms.What size firm.

What key issues must managers face in the financial distress process? ‡ Is it a temporary problem (technical insolvency) or a permanent problem caused by asset values below debt obligations (insolvency in bankruptcy)? ‡ Who should bear the losses? ‡ Would the firm be more valuable if it continued to operate or if it were liquidated? .

.Pst. or should it try to use informal procedures? ‡ Who would control the firm during liquidation or reorganization? PT Mandala Airlines mengajukan permohonan penundaan kewajiban pembayaran utang (PKPU) untuk merestrukturisasi kembali bisnis perusahaannya melalui Pengadilan Negeri Jakarta pusat dan terdaftar dengan nomor 01/PKPU/2011/PN.Niaga.‡ Should the firm file for bankruptcy.Jkt.

What informal remedies are available to firms in financial distress? ‡ Informal reorganization ‡ Informal liquidation ‡ Why might informal remedies be preferable to formal bankruptcy? ‡ What types of companies are most suitable for informal remedies? .

. Creditors prefer extension because they are promised eventual payment in full. or both.Informal Bankruptcy Terminology ‡ Workout: Voluntary informal reorganization plan. ± Extension: Creditors postpone the dates of required interest or principal payments. ‡ Restructuring: Current debt terms are revised to facilitate the firm s ability to pay.

Title to the debtor s assets is transferred to a third party. ‡ Assignment: An informal procedure for liquidating a firm s assets. and then the assets are sold off. . called a trustee or assignee.± Composition: Creditors voluntarily reduce their fixed claims on the debtor by either accepting a lower principal amount or accepting equity in lieu of debt repayment.

. bankruptcy law: ‡ Chapter 11: Business reorganization guidelines.S. ± Used only in unusual circumstances.Describe the following terms related to U. ‡ Chapter 7: Liquidation procedures. ‡ Trustee: ± Appointed to control the company when current management is incompetent or fraud is suspected.

‡ Involuntary bankruptcy: A bankruptcy petition filed in federal court by the distressed firm s creditors. .‡ Voluntary bankruptcy: A bankruptcy petition filed in federal court by the distressed firm s management.

.What are the major differences between an informal reorganization and reorganization in bankruptcy? ‡ Informal Reorganization: ± Less costly ± Relatively simple to create ± Typically allows creditors to recover more money and sooner.

(More.‡ Reorganization in Bankruptcy ± Avoids holdout problems. ± Interest and principal payments may be delayed without penalty until reorganization plan is approved.) . avoids common pool problem. ± Due to automatic stay provision...

. ± Reduces fraudulent conveyance problem.± Permits the firm to issue debtor in possession (DIP) financing. ± Gives debtor exclusive right to submit a proposed reorganization plan for agreement from the parties involved. ± Cramdown if majority in each creditor class approve plan.

‡ Plan filed with bankruptcy petition. ± Avoids holdout problems ± Preserves creditors claims ± Favorable tax treatment. ‡ Agreement to plan obtained from creditors prior to filing for bankruptcy.What is a prepackaged bankruptcy? ‡ New type of reorganization ± Combines the advantages of both formal and informal reorganizations. .

‡ Trustee s administrative costs.List the priority of claims in a Chapter 7 liquidation. ‡ Wages due workers within 3 months prior to filing. . ‡ Expenses incurred after involuntary case begun but before trustee appointed. ‡ Secured creditors.

‡ Preferred stockholders. ‡ Unfunded pension plan liabilities. ‡ Unsecured claims for customer deposits.‡ Unpaid contributions to employee benefit plans that should have been paid within 6 months prior to filing. . ‡ General (unsecured) creditors. ‡ Common stockholders. ‡ Taxes due.

5 .5 0.0 0.0 5. $10.2 3.5 4.0 0.0 $23.3 0.Liquidation Illustration Data (millions of $) Creditor Claims: Accounts payable Notes payable Accrued wages Federal taxes State and local taxes First mortgage Second mortgage Subordinated debentures* *Subordinated to notes payable.

Proceeds from liquidation: From current assets From fixed assets* Total receipts $14.5 $16.0 2. .5 * All fixed assets pledged as collateral to mortgage holders.

0 0.5 0.0 0.0 $3.0 Notes: (1) First mortgage receives entire proceeds from sale of fixed assets.5 0.5 $0.3 0.5 0.0 0.$3.Priority Distribution (millions of $) Creditor Accrued wages Federal taxes Other taxes First mortgage Second mortgage ClaimDistributionUnsatisfied $0. (2) $16.5 $0.0 0.3 0.5 0.5 $4.2 2.5 .0 remains for distribution to general creditors. leaving $0 for the second mortgage.5 = $13.5 $1. .2 3.

Includes priority distribution and $1.000 Pro rata amount = $13/$20 = 0.0 Initial Distrib. a.0 0.5 4.0 0.000 100.0% 5.325 0.325 65.825 94.5 0.250 Final Percent Amountb Received $6.General Creditor Distribution (millions of $) Creditor Accounts payable Notes payable Accrued wages Federal taxes Other taxes First mortgage Second mortgage Sub.850 21.0 0.325 2.a $6. Remaining GC Claim $10. .0 5.65.500 0.600 $13.0 0.75 transfer from subordinated debentures.500 3.0 0.300 100.0 0.200 100.2 0. deb. b.2 $16.0 0.0 2.500 65.0 0.0 $20.500 100.

some companies have used bankruptcy proceedings for other purposes: ± To break union contracts ± To hasten liability settlements .Other Motivations for Bankruptcy ‡ Normally. ‡ However. bankruptcy is motivated by serious current financial problems.

leaving little for creditors when liquidation does occur.Some Criticisms of Bankruptcy Laws ‡ Critics contend that current (1978) bankruptcy laws are flawed. ‡ Companies in bankruptcy can hurt other companies in industry. ‡ Too much value is siphoned off by lawyers. and trustees. managers. . ‡ Companies that have no hope remain alive too long.

‡ MDA to predict bankruptcy ‡ Recent business failures .

and how can it be used to predict bankruptcy? ‡ Multiple discriminant analysis (MDA) is a statistical technique similar to multiple regression. data from any firm can be entered into the model to assess the likelihood of future bankruptcy.What is MDA. ‡ It identifies the characteristics of firms that went bankrupt in the past. ‡ Then. .

MDA Illustration ‡ Assume you have the following 1997 data for 12 companies: ± Current ratio ± Debt ratio ‡ Six of the companies (marked by Xs) went bankrupt in 1998 while six (marked by dots) remained solvent. .

. X X X . .. X Discriminant Boundary X X Bankrupt Firms . . Debt Ratio = Solvent X = Bankrupt (More.Current Ratio Solvent Firms . ..) .

) .. or Z line. (More. statistically separates the bankrupt and solvent companies.. ‡ Note that two companies have been misclassified by the MDA program: One bankrupt company falls on the solvent (left) side and one solvent company falls on the bankrupt (right) side.‡ The discriminant boundary.

0(Debt ratio).  Furthermore.‡ Assume the equation for the boundary line is Z = -2 + 1.5(Current ratio) . . the future of the company is uncertain. If Z > 1.5. if Z = -1 to +1. bankruptcy is likely to occur. if Z < -1. bankruptcy is unlikely.

0.40) = +2.5( MDA To Predict Bankruptcy ‡ Suppose Firm S has CR = 4.0(0.75) = -3.5) .5 and DR = 0.0 and DR = 0. Z = -2 + 1.5(1.0(0. and firm is unlikely to go bankrupt. . and firm is likely to go bankrupt.75.0) . Then. Z = -2 + 1.5.  Suppose Firm B has CR = 1. Then.

but only for the near term. ‡ The more similar the historical sample to the firm being evaluated.Some Final Points ‡ The most well-known bankruptcy prediction model is Edward Altman s five factor model. ‡ Such models tend to work relatively well. the better the prediction. .

Sign up to vote on this title
UsefulNot useful