Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Financial Restructuring in Fresh-start Chapter 11 Reorganizations

01.12.2009
The effectiveness of the existing bankruptcy code has long been a source of vigorous debate. More and more lately, high-profile firms like General Motors, Enron, and K-Mart are seeking protection from creditors through Chapter 11 filings.

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 scholarlynews@wiley.com.

Bethany H. Carland-Adams | EurekAlert!
Further information:
http://www.wiley.com

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: A quantum walk of photons

Physicists from the University of Würzburg are capable of generating identical looking single light particles at the push of a button. Two new studies now demonstrate the potential this method holds.

The quantum computer has fuelled the imagination of scientists for decades: It is based on fundamentally different phenomena than a conventional computer....

Im Focus: Turmoil in sluggish electrons’ existence

An international team of physicists has monitored the scattering behaviour of electrons in a non-conducting material in real-time. Their insights could be beneficial for radiotherapy.

We can refer to electrons in non-conducting materials as ‘sluggish’. Typically, they remain fixed in a location, deep inside an atomic composite. It is hence...

Im Focus: Wafer-thin Magnetic Materials Developed for Future Quantum Technologies

Two-dimensional magnetic structures are regarded as a promising material for new types of data storage, since the magnetic properties of individual molecular building blocks can be investigated and modified. For the first time, researchers have now produced a wafer-thin ferrimagnet, in which molecules with different magnetic centers arrange themselves on a gold surface to form a checkerboard pattern. Scientists at the Swiss Nanoscience Institute at the University of Basel and the Paul Scherrer Institute published their findings in the journal Nature Communications.

Ferrimagnets are composed of two centers which are magnetized at different strengths and point in opposing directions. Two-dimensional, quasi-flat ferrimagnets...

Im Focus: World's thinnest hologram paves path to new 3-D world

Nano-hologram paves way for integration of 3-D holography into everyday electronics

An Australian-Chinese research team has created the world's thinnest hologram, paving the way towards the integration of 3D holography into everyday...

Im Focus: Using graphene to create quantum bits

In the race to produce a quantum computer, a number of projects are seeking a way to create quantum bits -- or qubits -- that are stable, meaning they are not much affected by changes in their environment. This normally needs highly nonlinear non-dissipative elements capable of functioning at very low temperatures.

In pursuit of this goal, researchers at EPFL's Laboratory of Photonics and Quantum Measurements LPQM (STI/SB), have investigated a nonlinear graphene-based...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Marine Conservation: IASS Contributes to UN Ocean Conference in New York on 5-9 June

24.05.2017 | Event News

AWK Aachen Machine Tool Colloquium 2017: Internet of Production for Agile Enterprises

23.05.2017 | Event News

Dortmund MST Conference presents Individualized Healthcare Solutions with micro and nanotechnology

22.05.2017 | Event News

 
Latest News

Physicists discover mechanism behind granular capillary effect

24.05.2017 | Physics and Astronomy

Measured for the first time: Direction of light waves changed by quantum effect

24.05.2017 | Physics and Astronomy

Marine Conservation: IASS Contributes to UN Ocean Conference in New York on 5-9 June

24.05.2017 | Event News

VideoLinks
B2B-VideoLinks
More VideoLinks >>>