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Subject: Re: [CANSLIM] Off-CANSLIM: Common stock post-Chapter 11?
Date: Sun, 28 Jul 2002 23:37:25 -0500
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jans,
You've hit on a subject that is extraordinarily important to the =
investor in individual equities. The key point to remember about a =
common stock is that the shareholders have what is referred to as =
"residual ownership." That is, if and only if there is anything left =
over when everybody else has been paid off will they get a piece of the =
pie. That's why you can own shares that have $0 value. On another =
investing board, a member was telling everybody how he'd made the =
"perfect low risk investment" in...tadah...WCOM. Said his downside risk =
was only the $125 he had in the stock, as he'd picked it up at a bargain =
price of $.11. Said his upside potential was a return of $18,000. He =
added that "WCOM wasn't going away" and went on for 3 paragraphs about =
all their assets. I mentioned the issue of residual ownership and tried =
to explain what that meant to a bankrupt company and to the existing =
common shareholders, and he *still* didn't get that the likelihood of =
losing 100% of his $125 was nearly 100%. Unbelievable. Anyway, as =
always, Briefing.com has written some excellent articles on the subject =
and this one gives a great overview of the pecking order of payoff under =
bankruptcy. As you can see, common stockholders fall to the bottom of =
the heap.
- -Katherine
=3D=3D=3D=3D=3D=3D
(apologies to those who don't have HTML capable email programs, but this =
is just much easier to cut & paste from the site)
Bankruptcy and The Risk of Common Stock=20
27-Nov-01 09:37 ET=20
=20
[BRIEFING.COM - Robert V. Green] For those investors holding =
stocks of companies headed into or already in bankruptcy, an =
understanding of how bankruptcy works is essential. For all holders of =
common stock, it is important to know that you are the "last in line" =
when it comes to bankruptcy proceedings. Here's how it works.=20
Declaring Bankruptcy
Bankruptcy becomes an option when a company realizes that it =
cannot pay all of its obligations from a combination of cash flow and =
cash reserves. The bankruptcy option allows a company to suspend and =
restructure existing obligations to allow the company to either continue =
operations or dissolve.=20
Bankruptcy proceedings are defined by federal law for publicly =
traded companies. Management of the company declares bankruptcy by =
filing a petition in Federal court.=20
Generally, the time sequence to enter bankruptcy follows these =
basic steps:
a.. Company realizes it has financial problems that cannot be =
addressed through normal business operations.=20
b.. Company files Chapter 11 or Chapter 7 bankruptcy petition=20
c.. Chapter 7 is giving up: The company ceases operations, =
sometimes immediately, liquidates (sells) everything and distribute =
proceeds to the claimants.=20
d.. Chapter 11 is reorganization: The company continues =
operations, but stops paying all debt interest and dividends, and =
restructures the debt and equity of the company to an "equitable" new =
level.=20
e.. The court approves the bankruptcy petition and the company =
officially is in bankruptcy.=20
During the entire time of bankruptcy, between the approval of the =
filing of the initial petition and the approval of reorganization or =
liquidation plan, every step of operation of the company, and payment of =
company funds, must be approved by the court. In essence, the court has =
complete control of the company during the bankruptcy period, although =
plans for management and operational decision making are submitted to =
the court, and generally do not originate there.=20
Purpose of Bankruptcy
Chapter 11 bankruptcy exists to allow a company to reorganize =
claims against it, in order to allow the company to continue operations. =
Bankruptcy is not designed to fully relieve a company from its =
obligations, but instead allows restructuring in order to permit the =
company to make good on its obligations under new payment schedules.=20
The common perception that debts are simply "forgiven" in =
bankruptcy stems from personal bankruptcy concepts, not corporate =
bankruptcy proceedings.=20
What are the company's obligations? Claimants file petitions to =
the court to make their claims. Generally, all claimants in a single =
class are organized together.=20
The Priority of Claims
Federal law establishes the hierarchy of claims against the =
company. Claims of a higher priority must be paid or settled before =
claims of the lower priority.=20
The basic principle behind all bankruptcy claim payments is =
simple:
The higher the level of risk assumed in a transaction with the =
company, the lower the level of claim in bankruptcy
This principle makes the assumption that the claimant, when he/she =
first made their deal with the company, negotiated a price which =
accounted for the level of risk they were assuming in the transaction.=20
The following table lists the priority of claims, by class of =
claimant.=20
Claim Priority Level Group Claim Comment=20
1. IRS 100% of unpaid taxes of all kinds. No surprise; the =
government wrote the laws. =20
2. Employees Any outstanding claims related to payroll, =
accrued vacation, pension contributions. 100% is generally paid. Affects =
only payments for existing work already performed. In Chapter 11, =
payroll and benefits continue to be paid unaffected. Jobs are not =
guaranteed, however. Employees are rarely paid less than 100% of =
outstanding balance. Also, while the cash value of contributions to a =
401(k) plan are secured, the value of the investment after purchase, for =
example, in company stock, is not. Management bonuses are frequently =
excluded. Option value is not included nor considered. Options are on =
common stock, (see which). =20
3. Debtors-in-Possession Creditors 100% regardless of =
whether secured or not. Includes persons lending money to a company =
during bankruptcy. They get first priority over all other claimants =
other than employees, since risk is highest. =20
4. Secured lenders Full outstanding balance, up to day of =
filing. Leases for real estate and equipment. Often current amounts =
continue to be paid through bankruptcy, and full amount owed is carried =
over, with security, into post-chapter 11 operation. (This means secured =
lenders effectively lose nothing if company exits Chapter 11 =
successfully.)=20
5. Vendors Outstanding balance up to day of filing. =
Frequently settled for less than the full amount, in exchange for a cash =
payment at time of approval, any excess amount owed is wiped off the =
books of the company. =20
6. Bondholders and Unsecured Lendors Principal, plus unpaid =
interest Frequently bondholders will accept partial cash payment with =
equity in the company issued in exchange for the unpaid principal =
amount. =20
7. Preferred Stock Liquidation preference, as stated in =
stock agreement, plus accrued dividends, if any. In many cases where =
debt payment is the cause of bankruptcy, there is little left after the =
above claimants have been settled, so the preferred stock has little =
bargaining position. Often restructured into common stock, with =
dividends wiped out upon exit on bankruptcy. For these reasons, =
preferred stockholder in public companies often have veto rights over =
debt issuance. =20
8. Common Stock Level of claim is on whatever is left over, =
after all of the above classes of claims have been settled. Rarely is =
anything left. In Chapter 11, if bondholders accept equity in exchange =
for debt, any amount left over can be assigned to common stock. Often, =
there is no value remaining. =20
Priority of Claim
In the table above, it is important to realize, each level of =
claimant is entitled by law to 100% of their claim, before anyone below =
them gets anything. It may be in their interest to accept less than 100% =
of their outstanding claim, but the starting point for all claims is =
100% of any outstanding balance.=20
It is also important to note:=20
Common stock is at the very bottom of the list.=20
Most claimants settle for less than the full amount of their =
claim, at the time of bankruptcy. The reason is that few companies can =
pay off 100% of any claim below the vendor level. Any claimant who =
insists on 100% of their claim risks throwing the company into =
liquidation.=20
Therefore most bondholders and claimants subordinate to =
bondholders settle for something less than the full amount owed to them, =
with some mechanism designed for them to possibly recover the unpaid =
balance over time, either through equity, or restructured debt or =
dividends.=20
The Process - Chapter 11
When a company enters bankruptcy, the future ownership structure =
is eventually determined by a court.=20
A "Plan of Reorganization" is submitted by management of the =
company to the court. Management generally tries to come up with a plan =
which will be acceptable to vendors and bondholders, prior to =
submission. A plan which is submitted to the court with the support of =
the major claim holders will generally be accepted by the judge.=20
The timeline for the court's process follows this basic outline:=20
a.. Plan of reorganization submitted=20
b.. Claimant parties either file statements of agreement to the =
plan or objections, and submit an alternate plan.=20
c.. Judge reviews and either accepts, requests new plan, or =
writes own plan (rare).=20
d.. The judge's decision is generally final, although an appeals =
process exists.=20
e.. The approved reorganization plan is put in place, the =
company is recapitalized, new securities are issued, old securities are =
cancelled.=20
f.. Company emerges from bankruptcy and continues operations.=20
Chapter 7, the alternative, is simply to sell everything and =
divide up the proceeds according to claimant's claim levels. In some =
cases, if the parties cannot agree on a Chapter 11 plan of =
reorganization, the bankruptcy court will order a Chapter 7 liquidation =
and the company is dissolved.=20
Common Stock Comes Last
As a common stock holder, you must realize that Chapter 11 =
bankruptcy law places your claim on the company assets after all other =
claims.=20
This is a fundamental principle of bankruptcy law. Your ownership =
of the company can be drastically reduced and even removed entirely.=20
In many cases, existing common stock holders do not lose their =
entire value, but are simply diluted to such an extent as to render the =
shares worthless. For example, common stock holders may hold 100% of =
equity in a company prior to bankruptcy, but only 1% afterwards, as =
equity is transferred to bondholders. The smallest shareholders don't =
even show up in the eighth decimal point of percentage ownerships. Those =
shares can be unilaterally cancelled by the bankruptcy court in exchange =
for a modest payment or even nothing at all. If this happens, you have =
no recourse as a common shareholder.=20
However, in some cases, common stock ownership is wiped out =
entirely. If the total valuation of the company is far less than the =
total debt owed, the equity value of the company may be transferred to =
the bondholders. With no existing value left for common holders, their =
ownership can be cancelled entirely.=20
Exodus Communications As Example
Exodus Communications filed bankruptcy on September 26, 2001. At =
that point, all bond payments and bill payments stopped, and the company =
filed a bankruptcy petition with the court. The company will now submit =
requests to make payments on bills and other expenses while in =
bankruptcy, and every payment must be approved by the court. Eventually =
a plan of reorganization will be submitted to the court.=20
The total debt owed by Exodus exceeds $3 billion. The total value =
of the company is probably in the $1 to $1.5 billion range, given a =
price/sales ratio of about 1.0. If the company were liquidated, =
bondholders would receive, at best, one-third of the amount owed to =
them. It is likely that bondholders, as a class, will approve a plan =
that gives them continuing debt of approximately $1 to $1.5 billion =
outstanding. This leaves them with another $1 to $1.5 billion still owed =
to them. In exchange for that amount, the bondholders may accept equity =
in the company instead.=20
Since the entire company is only worth about $1 to $1.5 billion, =
the bondholders will likely wind up owning the entire company. Common =
stockholders will be able to make a claim on whatever is left over, =
which is likely to be nothing. The company issued a statement to this =
effect on November 12, possibly concerned that the stock was still =
trading at a price that assumes there will be at least $100 million in =
value left over for existing common stockholders. The only possible =
explanation for this statement is that the company is perplexed that the =
stock still trades at $0.10 per share, and wants to avoid future =
liability by making it clear to holders of EXDSQ that their equity is =
almost certain to be wiped out, as bondholders claims are settled.=20
Is It Fair?
The investing world is a risk/reward proposition.=20
Common stock always gets the reward of all the upside. When a =
company grows in value, the newly created wealth is reflected only in =
the value of the common stock (and in preferred stock). None of the new =
value is reflected in the bonds. Although the credit rating may go up, =
the interest payments do not.=20
The flip side of this is that the common stock has no downside =
protection. When the company fails, common stock has no risk protection. =
From the email we have received it is clear that many common =
shareholders holding stock in bankrupt companies do not feel it is fair =
to pay bondholders in equity and recapitalizing a company.=20
Is it fair? Definitely. When you capture all of the upside, it is =
only fair that you also capture all of the downside.=20
Investors often ask, "How low can the price go?" The answer, for =
common stock holders of bankrupt companies, is "Zero."=20
Comments may be emailed to the author, Robert V. Green, at =
rvgreen@briefing.com=20
=20
----- Original Message -----=20
From: Spencer48@aol.com=20
To: canslim@lists.xmission.com=20
Sent: Sunday, July 28, 2002 9:18 PM
Subject: Re: [CANSLIM] Off-CANSLIM: Common stock post-Chapter 11?
Tom:
Does this mean that any bankrupt company that forms itself into a =
new=20
entity (perhaps by changing its name) can avoid its obligation to its =
common=20
shareholders because now the old shareholders are owners of a bankrupt =
company? =20
So the newly formed company can once again sell shares in the new =
company (while legally ignoring its fiduciary obligations (for =
instance,=20
paying the old shareholders from any company assets left over after =
the=20
secured creditors and preferred shareholders are paid) the =
shareholders of=20
its old company?
Isn't this (don't you think) like a legally sanctioned Ponzi =
scheme-ie,=20
the corporation big-boys are legally benefitting from running the =
company=20
into the ground?
jans
In a message dated 7/28/2002 9:24:55 PM Eastern Daylight Time,=20
stkguru@bellsouth.net writes:
<< The typical scenario is that a new corp is created, in which =
ownership is=20
by the secured creditors of the old corp, and possibly a partial =
ownership by=20
the unsecured creditors. Rarely do the common stock shareholders get =
any=20
ownership in the new corp. The assets are transferred to the new corp, =
remaining debts are left with the old. The secured creditors swap =
their claim=20
on assets of the old corp for ownership in the new corp. Net result,=20
shareholders are left with shares in a shell corp, owning only debt =
and no=20
assets>>
-
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<HTML><HEAD>
<META http-equiv=3DContent-Type content=3D"text/html; =
charset=3Diso-8859-1">
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<BODY bgColor=3D#ffffff>
<DIV>jans,</DIV>
<DIV> </DIV>
<DIV>You've hit on a subject that is extraordinarily important to the =
investor=20
in individual equities. The key point to remember about a common stock =
is that=20
the shareholders have what is referred to as "residual ownership." That =
is, if=20
and only if there is anything left over when everybody else has been =
paid off=20
will they get a piece of the pie. That's why you can own shares that =
have $0=20
value. On another investing board, a member was telling everybody how =
he'd made=20
the "perfect low risk investment" in...tadah...WCOM. Said his downside =
risk was=20
only the $125 he had in the stock, as he'd picked it up at a bargain =
price of=20
$.11. Said his upside potential was a return of $18,000. He added that =
"WCOM=20
wasn't going away" and went on for 3 paragraphs about all their assets. =
I=20
mentioned the issue of residual ownership and tried to explain what that =
meant=20
to a bankrupt company and to the existing common shareholders, and he =
*still*=20
didn't get that the likelihood of losing 100% of his $125 was nearly =
100%.=20
Unbelievable. Anyway, as always, Briefing.com has written some excellent =
articles on the subject and this one gives a great overview of the =
pecking order=20
of payoff under bankruptcy. As you can see, common stockholders fall to =
the=20
bottom of the heap.</DIV>
<DIV> </DIV>
<DIV>-Katherine</DIV>
<DIV> </DIV>
<DIV>=3D=3D=3D=3D=3D=3D</DIV>
<DIV>(apologies to those who don't have HTML capable email programs, but =
this is=20
just much easier to cut & paste from the site)</DIV>
<DIV> </DIV>
<DIV>
<TABLE cellSpacing=3D0 cellPadding=3D4 width=3D"100%">
<TBODY>
<TR>
<TD class=3Dheader><STRONG><FONT size=3D4>Bankruptcy and The Risk of =
Common=20
Stock</FONT></STRONG></TD></TR>
<TR>
<TD><FONT class=3Ddate face=3DVerdana =
size=3D1><STRONG>27-Nov-01 09:37=20
ET</STRONG></FONT></TD></TR>
<TR>
<TD height=3D8><STRONG><FONT face=3DVerdana =
size=3D1></FONT></STRONG></TD></TR>
<TR>
<TD>
<P>[BRIEFING.COM - Robert V. Green] For those investors holding =
stocks of=20
companies headed into or already in bankruptcy, an understanding =
of how=20
bankruptcy works is essential. For all holders of common stock, it =
is=20
important to know that you are the "last in line" when it comes to =
bankruptcy proceedings. Here's how it works. </P>
<H3>Declaring Bankruptcy</H3>
<P>Bankruptcy becomes an option when a company realizes that it =
cannot pay=20
all of its obligations from a combination of cash flow and cash =
reserves.=20
The bankruptcy option allows a company to suspend and restructure =
existing=20
obligations to allow the company to either continue operations or=20
dissolve. </P>
<P>Bankruptcy proceedings are defined by federal law for publicly =
traded=20
companies. Management of the company declares bankruptcy by filing =
a=20
petition in Federal court. </P>
<P>Generally, the time sequence to enter bankruptcy follows these =
basic=20
steps:</P>
<UL>
<LI>Company realizes it has financial problems that cannot be =
addressed=20
through normal business operations.=20
<LI>Company files Chapter 11 or Chapter 7 bankruptcy petition=20
<LI>Chapter 7 is giving up: The company ceases operations, =
sometimes=20
immediately, liquidates (sells) everything and distribute =
proceeds to=20
the claimants.=20
<LI>Chapter 11 is reorganization: The company continues =
operations, but=20
stops paying all debt interest and dividends, and restructures =
the debt=20
and equity of the company to an "equitable" new level.=20
<LI>The court approves the bankruptcy petition and the company=20
officially is in bankruptcy. </LI></UL>
<P>During the entire time of bankruptcy, between the approval of =
the=20
filing of the initial petition and the approval of reorganization =
or=20
liquidation plan, every step of operation of the company, and =
payment of=20
company funds, must be approved by the court. In essence, the =
court has=20
complete control of the company during the bankruptcy period, =
although=20
plans for management and operational decision making are submitted =
to the=20
court, and generally do not originate there. </P>
<H3>Purpose of Bankruptcy</H3>
<P>Chapter 11 bankruptcy exists to allow a company to reorganize =
claims=20
against it, in order to allow the company to continue operations.=20
Bankruptcy is not designed to fully relieve a company from its=20
obligations, but instead allows restructuring in order to permit =
the=20
company to make good on its obligations under new payment =
schedules. </P>
<P>The common perception that debts are simply "forgiven" in =
bankruptcy=20
stems from personal bankruptcy concepts, not corporate bankruptcy=20
proceedings. </P>
<P>What are the company's obligations? Claimants file petitions to =
the=20
court to make their claims. Generally, all claimants in a single =
class are=20
organized together. </P>
<H3>The Priority of Claims</H3>
<P>Federal law establishes the hierarchy of claims against the =
company.=20
Claims of a higher priority must be paid or settled before claims =
of the=20
lower priority. </P>
<P>The basic principle behind all bankruptcy claim payments is =
simple:</P>
<BLOCKQUOTE>
<P>The higher the level of risk assumed in a transaction with =
the=20
company, the lower the level of claim in =
bankruptcy</P></BLOCKQUOTE>
<P>This principle makes the assumption that the claimant, when =
he/she=20
first made their deal with the company, negotiated a price which =
accounted=20
for the level of risk they were assuming in the transaction. </P>
<P>The following table lists the priority of claims, by class of =
claimant.=20
</P>
<TABLE cellSpacing=3D2 cellPadding=3D2 width=3D"100%" =
border=3DBORDER>
<TBODY>
<TR vAlign=3Dcenter align=3Dmiddle bgColor=3D#cfcfcf>
<TH width=3D"10%">Claim Priority Level</TH>
<TH width=3D"10%">Group</TH>
<TH width=3D"40%">Claim</TH>
<TH width=3D"40%">Comment</TH></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>1.</TD>
<TD>IRS</TD>
<TD>100% of unpaid taxes of all kinds.</TD>
<TD>No surprise; the government wrote the laws. </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>2.</TD>
<TD>Employees</TD>
<TD>Any outstanding claims related to payroll, accrued =
vacation,=20
pension contributions. 100% is generally paid. Affects only =
payments=20
for existing work already performed. In Chapter 11, payroll =
and=20
benefits continue to be paid unaffected. Jobs are not =
guaranteed,=20
however. </TD>
<TD>Employees are rarely paid less than 100% of outstanding =
balance.=20
Also, while the cash value of contributions to a 401(k) plan =
are=20
secured, the value of the investment after purchase, for =
example, in=20
company stock, is not. Management bonuses are frequently =
excluded.=20
Option value is not included nor considered. Options are on =
common=20
stock, (see which). </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>3. </TD>
<TD>Debtors-in-Possession Creditors</TD>
<TD>100% regardless of whether secured or not.</TD>
<TD>Includes persons lending money to a company during =
bankruptcy.=20
They get first priority over all other claimants other than=20
employees, since risk is highest. </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>4.</TD>
<TD>Secured lenders</TD>
<TD>Full outstanding balance, up to day of filing.</TD>
<TD>Leases for real estate and equipment. Often current =
amounts=20
continue to be paid through bankruptcy, and full amount owed =
is=20
carried over, with security, into post-chapter 11 operation. =
(This=20
means secured lenders effectively lose nothing if company =
exits=20
Chapter 11 successfully.)</TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>5.</TD>
<TD>Vendors</TD>
<TD>Outstanding balance up to day of filing. </TD>
<TD>Frequently settled for less than the full amount, in =
exchange=20
for a cash payment at time of approval, any excess amount =
owed is=20
wiped off the books of the company. </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>6.</TD>
<TD>Bondholders and Unsecured Lendors</TD>
<TD>Principal, plus unpaid interest </TD>
<TD>Frequently bondholders will accept partial cash payment =
with=20
equity in the company issued in exchange for the unpaid =
principal=20
amount. </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>7.</TD>
<TD>Preferred Stock</TD>
<TD>Liquidation preference, as stated in stock agreement, plus =
accrued dividends, if any. </TD>
<TD>In many cases where debt payment is the cause of =
bankruptcy,=20
there is little left after the above claimants have been =
settled, so=20
the preferred stock has little bargaining position. Often=20
restructured into common stock, with dividends wiped out =
upon exit=20
on bankruptcy. For these reasons, preferred stockholder in =
public=20
companies often have veto rights over debt issuance. =
</TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>8.</TD>
<TD>Common Stock</TD>
<TD>Level of claim is on whatever is left over, after all of =
the=20
above classes of claims have been settled. </TD>
<TD>Rarely is anything left. In Chapter 11, if bondholders =
accept=20
equity in exchange for debt, any amount left over can be =
assigned to=20
common stock. Often, there is no value remaining.=20
</TD></TR></TBODY></TABLE>
<H3>Priority of Claim</H3>
<P>In the table above, it is important to realize, each level of =
claimant=20
is entitled by law to 100% of their claim, before anyone below =
them gets=20
anything. It may be in their interest to accept less than 100% of =
their=20
outstanding claim, but the starting point for all claims is 100% =
of any=20
outstanding balance. </P>
<P>It is also important to note: </P>
<BLOCKQUOTE>
<P><I>Common stock is at the very bottom of the list.=20
</I></P></BLOCKQUOTE>
<P>Most claimants settle for less than the full amount of their =
claim, at=20
the time of bankruptcy. The reason is that few companies can pay =
off 100%=20
of any claim below the vendor level. Any claimant who insists on =
100% of=20
their claim risks throwing the company into liquidation. </P>
<P>Therefore most bondholders and claimants subordinate to =
bondholders=20
settle for something less than the full amount owed to them, with =
some=20
mechanism designed for them to possibly recover the unpaid balance =
over=20
time, either through equity, or restructured debt or dividends. =
</P>
<H3>The Process - Chapter 11</H3>
<P>When a company enters bankruptcy, the future ownership =
structure is=20
eventually determined by a court. </P>
<P>A "Plan of Reorganization" is submitted by management of the =
company to=20
the court. Management generally tries to come up with a plan which =
will be=20
acceptable to vendors and bondholders, prior to submission. A plan =
which=20
is submitted to the court with the support of the major claim =
holders will=20
generally be accepted by the judge. </P>
<P>The timeline for the court's process follows this basic =
outline: </P>
<UL>
<LI>Plan of reorganization submitted=20
<LI>Claimant parties either file statements of agreement to the =
plan or=20
objections, and submit an alternate plan.=20
<LI>Judge reviews and either accepts, requests new plan, or =
writes own=20
plan (rare).=20
<LI>The judge's decision is generally final, although an appeals =
process=20
exists.=20
<LI>The approved reorganization plan is put in place, the =
company is=20
recapitalized, new securities are issued, old securities are =
cancelled.=20
<LI>Company emerges from bankruptcy and continues operations. =
</LI></UL>
<P>Chapter 7, the alternative, is simply to sell everything and =
divide up=20
the proceeds according to claimant's claim levels. In some cases, =
if the=20
parties cannot agree on a Chapter 11 plan of reorganization, the=20
bankruptcy court will order a Chapter 7 liquidation and the =
company is=20
dissolved. </P>
<H3>Common Stock Comes Last</H3>
<P>As a common stock holder, you must realize that Chapter 11 =
bankruptcy=20
law places your claim on the company assets after all other =
claims. </P>
<P>This is a fundamental principle of bankruptcy law. Your =
ownership of=20
the company can be drastically reduced and even removed entirely. =
</P>
<P>In many cases, existing common stock holders do not lose their =
entire=20
value, but are simply diluted to such an extent as to render the =
shares=20
worthless. For example, common stock holders may hold 100% of =
equity in a=20
company prior to bankruptcy, but only 1% afterwards, as equity is=20
transferred to bondholders. The smallest shareholders don't even =
show up=20
in the eighth decimal point of percentage ownerships. Those shares =
can be=20
unilaterally cancelled by the bankruptcy court in exchange for a =
modest=20
payment or even nothing at all. If this happens, you have no =
recourse as a=20
common shareholder. </P>
<P>However, in some cases, common stock ownership is wiped out =
entirely.=20
If the total valuation of the company is far less than the total =
debt=20
owed, the equity value of the company may be transferred to the=20
bondholders. With no existing value left for common holders, their =
ownership can be cancelled entirely. </P>
<H3>Exodus Communications As Example</H3>
<P>Exodus Communications filed bankruptcy on September 26, 2001. =
At that=20
point, all bond payments and bill payments stopped, and the =
company filed=20
a bankruptcy petition with the court. The company will now submit =
requests=20
to make payments on bills and other expenses while in bankruptcy, =
and=20
every payment must be approved by the court. Eventually a plan of=20
reorganization will be submitted to the court. </P>
<P>The total debt owed by Exodus exceeds $3 billion. The total =
value of=20
the company is probably in the $1 to $1.5 billion range, given a=20
price/sales ratio of about 1.0. If the company were liquidated,=20
bondholders would receive, at best, one-third of the amount owed =
to them.=20
It is likely that bondholders, as a class, will approve a plan =
that gives=20
them continuing debt of approximately $1 to $1.5 billion =
outstanding. This=20
leaves them with another $1 to $1.5 billion still owed to them. In =
exchange for that amount, the bondholders may accept equity in the =
company=20
instead. </P>
<P>Since <I>the entire company</I> is only worth about $1 to $1.5 =
billion,=20
the bondholders will likely wind up owning <I>the entire =
company.</I>=20
Common stockholders will be able to make a claim on whatever is =
left over,=20
which is likely to be nothing. The company issued a statement to =
this=20
effect on November 12, possibly concerned that the stock was still =
trading=20
at a price that assumes there will be at least $100 million in =
value left=20
over for existing common stockholders. The only possible =
explanation for=20
this statement is that the company is perplexed that the stock =
still=20
trades at $0.10 per share, and wants to avoid future liability by =
making=20
it clear to holders of EXDSQ that their equity is almost certain =
to be=20
wiped out, as bondholders claims are settled. </P>
<H3>Is It Fair?</H3>
<P>The investing world is a risk/reward proposition. </P>
<P>Common stock always gets the reward of <I>all the upside.</I> =
When a=20
company grows in value, the newly created wealth is reflected only =
in the=20
value of the common stock (and in preferred stock). None of the =
new value=20
is reflected in the bonds. Although the credit rating may go up, =
the=20
interest payments do not. </P>
<P>The flip side of this is that the common stock has no downside=20
protection. When the company fails, common stock has no risk =
protection.=20
</P>
<P>From the email we have received it is clear that many common=20
shareholders holding stock in bankrupt companies do not feel it is =
fair to=20
pay bondholders in equity and recapitalizing a company. </P>
<P>Is it fair? Definitely. When you capture all of the upside, it =
is only=20
fair that you also capture all of the downside. </P>
<P>Investors often ask, "How low can the price go?" The answer, =
for common=20
stock holders of bankrupt companies, is "Zero." </P>
<P>Comments may be emailed to the author, Robert V. Green, at <A=20
href=3D"mailto:rvgreen@briefing.com">rvgreen@briefing.com</A> =
<!--(V) (RVG)--></P></TD></TR></TBODY></TABLE></DIV>
<BLOCKQUOTE=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3DSpencer48@aol.com=20
href=3D"mailto:Spencer48@aol.com">Spencer48@aol.com</A> </DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Sunday, July 28, 2002 =
9:18 PM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> Re: [CANSLIM] =
Off-CANSLIM:=20
Common stock post-Chapter 11?</DIV>
<DIV><BR></DIV>Tom:<BR><BR> Does this mean =
that any=20
bankrupt company that forms itself into a new <BR>entity (perhaps by =
changing=20
its name) can avoid its obligation to its common <BR>shareholders =
because now=20
the old shareholders are owners of a bankrupt <BR>company? =20
<BR><BR> So the newly formed company can once =
again=20
sell shares in the new <BR>company (while legally ignoring its =
fiduciary=20
obligations (for instance, <BR>paying the old shareholders from any =
company=20
assets left over after the <BR>secured creditors and preferred =
shareholders=20
are paid) the shareholders of <BR>its old=20
company?<BR><BR> Isn't this (don't you think) =
like a=20
legally sanctioned Ponzi scheme-ie, <BR>the corporation big-boys are =
legally=20
benefitting from running the company <BR>into the=20
ground?<BR><BR>jans<BR><BR><BR>In a message dated 7/28/2002 9:24:55 PM =
Eastern=20
Daylight Time, <BR><A=20
href=3D"mailto:stkguru@bellsouth.net">stkguru@bellsouth.net</A>=20
writes:<BR><BR><< The typical scenario is that a new corp is =
created, in=20
which ownership is <BR>by the secured creditors of the old corp, and =
possibly=20
a partial ownership by <BR>the unsecured creditors. Rarely do =
the common=20
stock shareholders get any <BR>ownership in the new corp. The assets =
are=20
transferred to the new corp, <BR>remaining debts are left with the =
old. The=20
secured creditors swap their claim <BR>on assets of the old corp for =
ownership=20
in the new corp. Net result, <BR>shareholders are left with shares in =
a shell=20
corp, owning only debt and no <BR>assets>><BR><BR>-<BR>-To=20
subscribe/unsubscribe, email "<A=20
=
href=3D"mailto:majordomo@xmission.com">majordomo@xmission.com</A>"<BR>-In=
the=20
email body, write "subscribe canslim" or<BR>-"unsubscribe =
canslim". Do=20
not use quotes in your email.</BLOCKQUOTE></BODY></HTML>
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- -In the email body, write "subscribe canslim" or
- -"unsubscribe canslim". Do not use quotes in your email.
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