But are these firms really getting the "fresh start" they need? In a recent edition of Financial Management, researchers Randall Heron, Erik Lie, and Kimberly Rodgers argue that the Chapter 11 process is flawed and fails to offer the clean slate needed to establish new capital structure.
Their article, "Financial restructuring in fresh-start Chapter 11 reorganizations", looks at the debt ratio of 172 firms emerging from Chapter 11 "fresh start" accounting rules. Using a range of variables, they analyze how differing firm characteristics and the reorganization process affect capital structures.
Although a company's debt burden is substantially reduced by reorganizing, they found, the firm still winds up with higher debt ratios than industry norms. Debt is sticky -- in fact, a firm's long-term debt ratio is particularly high after Chapter 11. The median total at the end of the first year a firm emerges is 0.392 as compared to an industry norm of 0.283. In two years, the median debt ratio declined to 0.362, compared to an industry norm of 0.272.
Total debt is also substantially higher – due, in part, to inefficiencies in the Chapter 11 process which block firms from discarding old capital structures in favor of a fresh start. Even in organizations where at least 50 % of equity ownership is transferred to creditors, holdout problems plague emerging capital structure. Creditors are reluctant to trade senior claims for equity, seeing them as a way to force liquidation should the firm's profitability lag.
A key factor in the speed of emergence appears tied to the circumstances leading up to the bankruptcy. Those firms struggling with financial difficulty -- not economic distress -- spent less time in Chapter 11. "The data suggest that firms that fit this profile are able to emerge more quickly perhaps because they have fewer, more concentrated creditor classes, and/or because they were simply over-levered, but still clearly economically viable," the article states.
Finally, the data pokes holes in claims about so-called pro-debtor vs. pro-creditor bankruptcy courts by examining filings in the District of Delaware and the Southern District of New York. "There is no support for the notion that post-emergence debt ratios for firms that reorganize under the supervision of Delaware courts are abnormally high," the study concludes.
This study is published in the Winter 2009 issue of Financial Management. Media wishing to receive a PDF of this article may contact firstname.lastname@example.org.
Bethany H. Carland-Adams | EurekAlert!
Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik
Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)
Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.
The results will be published on March 22 in the journal „Astronomy & Astrophysics“.
Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...
Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.
Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...
In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...
Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.
Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...
Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.
Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...
20.03.2017 | Event News
14.03.2017 | Event News
07.03.2017 | Event News
27.03.2017 | Earth Sciences
27.03.2017 | Life Sciences
27.03.2017 | Life Sciences