Chap 11 and Unsecured Claims

[shon7]

How is it beneficial for labor groups to sell their unsecured claims. Won't the equity in the reorganized company be worth more?

 

[AA717driver]

Chances are, you'll get nothing from those claims. If you can sell them to a "consolidator", you'll get your money up front.TC

 

[Occam's Razor]

How is it beneficial for labor groups to sell their unsecured claims. Won't the equity in the reorganized company be worth more?

How much is the stock issued after the first USAirways reorg worth now?

Stock is risk. Cash is not.

If you're risk-tolerant and like the upside potential...stock is more attractive. If you're a candy-pants girlie man (like me!) you take cash if you can cram it into your Retirement Savings Plan.

Lots of variables, but I think it mostly comes down to risk.

 

[FDJ2]

How is it beneficial for labor groups to sell their unsecured claims. Won't the equity in the reorganized company be worth more?

You are assuming that a reorganized company will allocate shares to each debtor that has a market value equivalent to the debt. That is just not normally the case. The reorganized company will issue a certain amount of shares to its unsecured creditors, then each creditor will receive his prorata portion of that based on the size of his claim compared to the sum of all the claims, finaly, the market will determine the value of each share.

A simple example (using small numbers for simplicity) would be to assume that you have a $100 claim and the total claim pool is $1000, then you will be entitled to 10% of how ever many shares the company decides to issue to the unsecured creditors.

Now assume the company issues 200 shares to its unsecured creditors. You would be entitled to 10% of that, or 20 shares.

Now assume the market values each share of the reorganized company at $3/share, you would get $60 for your $100 claim, or 60 cents on the dollar.

Of course you never really know what the value of those shares is until the company goes public again. So it could be more, or it could be less. The other complicating factor is that you will not receive all those shares on the first day the company exits. You might receive 14 on day one and the rest over the next year and a half.

Now assume you have the same claim and along comes Mr. Hedge Fund and he makes his living on short bets and long bets. His investment strategy is completely different then yours and he is willing to buy your claim at 70 cents on the dollar and he will pay it all to you within days of bankruptcy exit.

You could sell your claim to him because you either want your money ASAP, or you think he's offering more than the market will bear on day one after BK exit, or you don't want to have all of your claim locked up in stock and you want it all in cash, but you'd be willing to use a portion to buy company stock when it exits.

The bottomline is that some hedge funds are willing to pay you a premium to own a piece of a company emerging from BK. If you want to invest in the company, just buy stock on the day it exits with the money Mr Hedge Fund paid you.

Clear as mud.