Go to Jeff Salisbury LWGate Home Page.From: "Katherine Malm" <kmalm@earthlink.net>
Subject: Re: [CANSLIM] Off-CANSLIM: Common stock post-Chapter 11?
Date: Mon, 29 Jul 2002 10:07:20 -0500
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MessageAh, Duke....you are a breath of fresh air....only *you* could =
find the humor in a tax-free "gain" like that!
Katherine
----- Original Message -----=20
From: Duke Miller=20
To: canslim@lists.xmission.com=20
Sent: Monday, July 29, 2002 9:36 AM
Subject: RE: [CANSLIM] Off-CANSLIM: Common stock post-Chapter 11?
I think I speak for the rest of us when I say that I'm jealous, =
Katherine, that you're sharing your knowledge with another board! Tell =
us it's not true!
To your point on "residual ownership", during the go-go days I had a =
chance to buy two "units" of a high tech "sure thing." After visiting =
their offices and meeting with top management five years ago, I =
convinced myself I was privileged to be in on the early action. I paid =
$110,000 for the two units of Class C common stock, a total of 20,000 =
shares. Long story short, two months ago I got a letter about their =
filing for bankruptcy, phoned my accountant, and here's her verbatim: =
"You need to: a) Save the letter for the IRS; and b), between now and =
December 31, capture whatever capital gains you can, 'cause they'll be =
tax-free." Free?
Duke
-----Original Message-----
From: owner-canslim@lists.xmission.com =
[mailto:owner-canslim@lists.xmission.com] On Behalf Of Katherine Malm
Sent: Monday, July 29, 2002 12:37 AM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Off-CANSLIM: Common stock post-Chapter 11?
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=20
company? =20
So the newly formed company can once again sell shares in the =
new=20
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,=20
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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<META http-equiv=3DContent-Type content=3D"text/html; =
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<BODY bgColor=3D#ffffff>
<DIV>Ah, Duke....you are a breath of fresh air....only *you* could find =
the=20
humor in a tax-free "gain" like that!</DIV>
<DIV> </DIV>
<DIV>Katherine</DIV>
<DIV> </DIV>
<BLOCKQUOTE dir=3Dltr=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=3Ddukemill@tampabay.rr.com =
href=3D"mailto:dukemill@tampabay.rr.com">Duke=20
Miller</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> Monday, July 29, 2002 =
9:36 AM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> RE: [CANSLIM] =
Off-CANSLIM:=20
Common stock post-Chapter 11?</DIV>
<DIV><BR></DIV>
<DIV><SPAN class=3D328150514-29072002><FONT face=3DArial>I think I =
speak for the=20
rest of us when I say that I'm jealous, Katherine, that you're sharing =
your=20
knowledge with another board! Tell us it's not =
true!</FONT></SPAN></DIV>
<DIV><SPAN class=3D328150514-29072002><FONT=20
face=3DArial></FONT></SPAN> </DIV>
<DIV><SPAN class=3D328150514-29072002><FONT face=3DArial>To your point =
on=20
"residual ownership", during the go-go days I had a chance to buy two =
"units"=20
of a high tech "sure thing." After visiting their offices =
and=20
meeting with top management five years ago, I convinced myself I was=20
privileged to be in on the early action. I paid $110,000 =
for the=20
two units of Class C common stock, a total of 20,000 shares. =
Long story=20
short, two months ago I got a letter about their filing for =
bankruptcy, phoned=20
my accountant, and here's her verbatim: "You need to: a) Save the =
letter for=20
the IRS; and b), between now and December 31, capture whatever capital =
gains=20
you can, 'cause they'll be tax-free." Free?</FONT></SPAN></DIV>
<DIV><SPAN class=3D328150514-29072002></SPAN> </DIV>
<DIV><SPAN class=3D328150514-29072002><FONT =
face=3DArial>Duke</FONT></SPAN></DIV>
<BLOCKQUOTE dir=3Dltr style=3D"MARGIN-RIGHT: 0px">
<DIV></DIV>
<DIV class=3DOutlookMessageHeader lang=3Den-us dir=3Dltr =
align=3Dleft><FONT=20
face=3DTahoma size=3D2>-----Original Message-----<BR><B>From:</B>=20
owner-canslim@lists.xmission.com =
[mailto:owner-canslim@lists.xmission.com]=20
<B>On Behalf Of </B>Katherine Malm<BR><B>Sent:</B> Monday, July 29, =
2002=20
12:37 AM<BR><B>To:</B> canslim@lists.xmission.com<BR><B>Subject:</B> =
Re:=20
[CANSLIM] Off-CANSLIM: Common stock post-Chapter =
11?<BR><BR></FONT></DIV>
<DIV>jans,</DIV>
<DIV> </DIV>
<DIV>You've hit on a subject that is extraordinarily important to =
the=20
investor in individual equities. The key point to remember about a =
common=20
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=20
why you can own shares that have $0 value. On another investing =
board, a=20
member was telling everybody how he'd made the "perfect low risk =
investment"=20
in...tadah...WCOM. Said his downside risk was only the $125 he had =
in the=20
stock, as he'd picked it up at a bargain price of $.11. Said his =
upside=20
potential was a return of $18,000. He added that "WCOM wasn't going =
away"=20
and went on for 3 paragraphs about all their assets. I mentioned the =
issue=20
of residual ownership and tried to explain what that meant to a =
bankrupt=20
company and to the existing common shareholders, and he *still* =
didn't get=20
that the likelihood of losing 100% of his $125 was nearly 100%.=20
Unbelievable. Anyway, as always, Briefing.com has written some =
excellent=20
articles on the subject and this one gives a great overview of the =
pecking=20
order of payoff under bankruptcy. As you can see, common =
stockholders fall=20
to the 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=20
this is 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=20
Common 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=20
of companies headed into or already in bankruptcy, an =
understanding of=20
how bankruptcy works is essential. For all holders of common =
stock, it=20
is important to know that you are the "last in line" when it =
comes to=20
bankruptcy proceedings. Here's how it works. </P>
<H3>Declaring Bankruptcy</H3>
<P>Bankruptcy becomes an option when a company realizes that =
it cannot=20
pay all of its obligations from a combination of cash flow and =
cash=20
reserves. The bankruptcy option allows a company to suspend =
and=20
restructure existing obligations to allow the company to =
either=20
continue operations or dissolve. </P>
<P>Bankruptcy proceedings are defined by federal law for =
publicly=20
traded companies. Management of the company declares =
bankruptcy by=20
filing a petition in Federal court. </P>
<P>Generally, the time sequence to enter bankruptcy follows =
these=20
basic steps:</P>
<UL>
<LI>Company realizes it has financial problems that cannot =
be=20
addressed 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=20
to the claimants.=20
<LI>Chapter 11 is reorganization: The company continues =
operations,=20
but stops paying all debt interest and dividends, and =
restructures=20
the debt 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=20
of company funds, must be approved by the court. In essence, =
the court=20
has complete control of the company during the bankruptcy =
period,=20
although plans for management and operational decision making =
are=20
submitted to the court, and generally do not originate there. =
</P>
<H3>Purpose of Bankruptcy</H3>
<P>Chapter 11 bankruptcy exists to allow a company to =
reorganize=20
claims against it, in order to allow the company to continue=20
operations. Bankruptcy is not designed to fully relieve a =
company from=20
its obligations, but instead allows restructuring in order to =
permit=20
the company to make good on its obligations under new payment=20
schedules. </P>
<P>The common perception that debts are simply "forgiven" in=20
bankruptcy stems from personal bankruptcy concepts, not =
corporate=20
bankruptcy 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=20
are organized together. </P>
<H3>The Priority of Claims</H3>
<P>Federal law establishes the hierarchy of claims against the =
company. Claims of a higher priority must be paid or settled =
before=20
claims of the 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=20
accounted for the level of risk they were assuming in the =
transaction.=20
</P>
<P>The following table lists the priority of claims, by class =
of=20
claimant. </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=20
payments for existing work already performed. In Chapter =
11,=20
payroll and benefits continue to be paid unaffected. =
Jobs are=20
not guaranteed, however. </TD>
<TD>Employees are rarely paid less than 100% of =
outstanding=20
balance. Also, while the cash value of contributions to =
a 401(k)=20
plan are secured, the value of the investment after =
purchase,=20
for example, in company stock, is not. Management =
bonuses are=20
frequently excluded. Option value is not included nor=20
considered. Options are on common 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=20
bankruptcy. They get first priority over all other =
claimants=20
other than 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.=20
(This means secured lenders effectively lose nothing if =
company=20
exits 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=20
exchange for a cash payment at time of approval, any =
excess=20
amount owed is 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=20
principal amount. </TD></TR>
<TR vAlign=3Dcenter align=3Dmiddle>
<TD>7.</TD>
<TD>Preferred Stock</TD>
<TD>Liquidation preference, as stated in stock agreement, =
plus=20
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 the preferred stock has little bargaining =
position.=20
Often restructured into common stock, with dividends =
wiped out=20
upon exit on bankruptcy. For these reasons, preferred=20
stockholder in public companies often have veto rights =
over debt=20
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 equity in exchange for debt, any amount left over =
can be=20
assigned to 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=20
claimant is entitled by law to 100% of their claim, before =
anyone=20
below them gets anything. It may be in their interest to =
accept less=20
than 100% of their outstanding claim, but the starting point =
for all=20
claims is 100% of any 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,=20
at the time of bankruptcy. The reason is that few companies =
can pay=20
off 100% of any claim below the vendor level. Any claimant who =
insists=20
on 100% of their claim risks throwing the company into =
liquidation.=20
</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=20
over time, either through equity, or restructured debt or =
dividends.=20
</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=20
company to the court. Management generally tries to come up =
with a=20
plan which will be acceptable to vendors and bondholders, =
prior to=20
submission. A plan which is submitted to the court with the =
support of=20
the major claim holders will generally be accepted by the =
judge. </P>
<P>The timeline for the court's process follows this basic =
outline:=20
</P>
<UL>
<LI>Plan of reorganization submitted=20
<LI>Claimant parties either file statements of agreement to =
the plan=20
or objections, and submit an alternate plan.=20
<LI>Judge reviews and either accepts, requests new plan, or =
writes=20
own plan (rare).=20
<LI>The judge's decision is generally final, although an =
appeals=20
process 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.=20
</LI></UL>
<P>Chapter 7, the alternative, is simply to sell everything =
and divide=20
up the proceeds according to claimant's claim levels. In some =
cases,=20
if the parties cannot agree on a Chapter 11 plan of =
reorganization,=20
the bankruptcy court will order a Chapter 7 liquidation and =
the=20
company is dissolved. </P>
<H3>Common Stock Comes Last</H3>
<P>As a common stock holder, you must realize that Chapter 11=20
bankruptcy law places your claim on the company assets after =
all other=20
claims. </P>
<P>This is a fundamental principle of bankruptcy law. Your =
ownership=20
of the company can be drastically reduced and even removed =
entirely.=20
</P>
<P>In many cases, existing common stock holders do not lose =
their=20
entire value, but are simply diluted to such an extent as to =
render=20
the shares worthless. For example, common stock holders may =
hold 100%=20
of equity in a company prior to bankruptcy, but only 1% =
afterwards, as=20
equity is transferred to bondholders. The smallest =
shareholders don't=20
even show up in the eighth decimal point of percentage =
ownerships.=20
Those shares can be unilaterally cancelled by the bankruptcy =
court in=20
exchange for a modest payment or even nothing at all. If this =
happens,=20
you have no recourse as a common shareholder. </P>
<P>However, in some cases, common stock ownership is wiped out =
entirely. If the total valuation of the company is far less =
than the=20
total debt owed, the equity value of the company may be =
transferred to=20
the bondholders. With no existing value left for common =
holders, their=20
ownership can be cancelled entirely. </P>
<H3>Exodus Communications As Example</H3>
<P>Exodus Communications filed bankruptcy on September 26, =
2001. At=20
that point, all bond payments and bill payments stopped, and =
the=20
company filed a bankruptcy petition with the court. The =
company will=20
now submit requests to make payments on bills and other =
expenses while=20
in bankruptcy, and every payment must be approved by the =
court.=20
Eventually a plan of reorganization will be submitted to the =
court.=20
</P>
<P>The total debt owed by Exodus exceeds $3 billion. The total =
value=20
of 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=20
them. It is likely that bondholders, as a class, will approve =
a plan=20
that gives them continuing debt of approximately $1 to $1.5 =
billion=20
outstanding. This leaves them with another $1 to $1.5 billion =
still=20
owed to them. In exchange for that amount, the bondholders may =
accept=20
equity in the company instead. </P>
<P>Since <I>the entire company</I> is only worth about $1 to =
$1.5=20
billion, the bondholders will likely wind up owning <I>the =
entire=20
company.</I> Common stockholders will be able to make a claim =
on=20
whatever is left over, which is likely to be nothing. The =
company=20
issued a statement to this effect on November 12, possibly =
concerned=20
that the stock was still trading at a price that assumes there =
will be=20
at least $100 million in value left over for existing common=20
stockholders. The only possible explanation for this statement =
is that=20
the company is perplexed that the stock still trades at $0.10 =
per=20
share, and wants to avoid future liability by making it clear =
to=20
holders of EXDSQ that their equity is almost certain to be =
wiped out,=20
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=20
a company grows in value, the newly created wealth is =
reflected only=20
in the value of the common stock (and in preferred stock). =
None of the=20
new value is reflected in the bonds. Although the credit =
rating may go=20
up, the 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=20
protection. </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=20
fair to pay bondholders in equity and recapitalizing a =
company. </P>
<P>Is it fair? Definitely. When you capture all of the upside, =
it is=20
only fair that you also capture all of the downside. </P>
<P>Investors often ask, "How low can the price go?" The =
answer, for=20
common 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=20
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
=20
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Sunday, July 28, 2002 =
9:18=20
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=20
any bankrupt company that forms itself into a new <BR>entity =
(perhaps by=20
changing its name) can avoid its obligation to its common =
<BR>shareholders=20
because now the old shareholders are owners of a bankrupt=20
<BR>company? <BR><BR> So the newly =
formed=20
company can once again sell shares in the new <BR>company (while =
legally=20
ignoring its fiduciary obligations (for instance, <BR>paying the =
old=20
shareholders from any company assets left over after the =
<BR>secured=20
creditors and preferred shareholders are paid) the shareholders of =
<BR>its=20
old company?<BR><BR> Isn't this (don't you =
think)=20
like a legally sanctioned Ponzi scheme-ie, <BR>the corporation =
big-boys=20
are legally 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=20
Eastern 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 which ownership is <BR>by the secured creditors of the =
old=20
corp, and possibly a partial ownership by <BR>the unsecured =20
creditors. Rarely do the common stock shareholders get any =
<BR>ownership=20
in the new corp. The assets are transferred to the new corp, =
<BR>remaining=20
debts are left with the old. The secured creditors swap their =
claim <BR>on=20
assets of the old corp for ownership in the new corp. Net result,=20
<BR>shareholders are left with shares in a shell corp, owning only =
debt=20
and no <BR>assets>><BR><BR>-<BR>-To subscribe/unsubscribe, =
email "<A=20
=
href=3D"mailto:majordomo@xmission.com">majordomo@xmission.com</A>"<BR>-In=
=20
the email body, write "subscribe canslim" or<BR>-"unsubscribe=20
canslim". Do not use quotes in your=20
email.</BLOCKQUOTE></BLOCKQUOTE></BLOCKQUOTE></BODY></HTML>
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- -
- -To subscribe/unsubscribe, email "majordomo@xmission.com"
- -In the email body, write "subscribe canslim" or
- -"unsubscribe canslim". Do not use quotes in your email.
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