Chapter 11: Bankruptcy Restructuring발음듣기
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Chapter 11: Bankruptcy Restructuring
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In the last video we talked about the scenario where a company, for whatever reason, it just couldn't pay it's debt holders.발음듣기
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It went into bankruptcy, and it was determined that these assets that it had right here, that it made no sense operating them as a company.발음듣기
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And they get paid first. And if there wasn't enough money to pay all of the debt holders, then the equity holders got nothing.발음듣기
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That was the last video. And in that case, and I think that's what most people associate when you say that a company has gone bankrupt.발음듣기
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They can't pay these guys. We're just going to take these into possession by the courts and then just liquidate the assets.발음듣기
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But that raises kind of an obvious question of, well, what if these assets are worth something?발음듣기
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Or for some reason, I have to pay back some loans because I messed - and I'll talk more about covenants and things like that.발음듣기
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Covenants are pretty much a bunch of rules that the debt holders say, look, you're good, but if any of these x, y, or z things happen, we can take you into bankruptcy.발음듣기
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But it's determined that these assets, right here, are actually worth more as an operating entity than they are if you were to liquidate them.발음듣기
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Right? Let's actually take this example as a car company, because it's very salient to our, at least it was - I've heard a lot less about the auto bailouts, but it was very salient at the end of last year.발음듣기
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And I'll teach you in a future video how do you see what is the cash being generated by the assets.발음듣기
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And then you have to subtract out the cash that has to be used to pay the debt holders, because you're paying interest, and then what's left over for equity.발음듣기
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And let's say, for whatever reason, either interest rates went up, or they had a bad quarter or a bad year, and they just didn't generate enough cash, let's say they couldn't pay off one of the debt holders.발음듣기
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And that debt holder says, hey, you couldn't pay my interest payment, or you couldn't pay the principal payment.발음듣기
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If we were just to shut down the factory and lay off the employees, we're going to get nothing for these assets.발음듣기
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An empty car factory is pretty much useless, especially when the other people in the industry are in no mood to buy the factories from you.발음듣기
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And actually what happens is - because these guys didn't have enough cash to pay off their debt holders - what happens is that they take on a new loan, called a debtor-in-possession loan.발음듣기
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It's called DIP financing. It's actually a great business, although it's become scarce recently.발음듣기
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And what this provides is a company with some kind of cushion cash so that it can keep operating, so it can keep the lights on.발음듣기
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And this is why, you probably - every airline has, some of them, have gone into bankruptcy multiple times, but they still exist.발음듣기
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A lot of times when someone goes into Chapter 11 and then they come out of it and they go back into it, they call that Chapter 22, and then Chapter 33.발음듣기
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So the assets - essentially it becomes kind of the bankruptcy court takes over, and they hire some investments.발음듣기
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They'll get the debtor-in-possession financing so that the company has some cash to operate, pay the bills, and pay the employees and whatever else.발음듣기
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The company keeps operating as it always would so it can pay its suppliers and operate as a regular business.발음듣기
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And essentially there will be a bank associated with the bankruptcy court whose whole job - and it's all part of a negotiation - is to value this.발음듣기
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And they're just going to say - based on the prospects of this company, how fast it's growing or how fast it's not growing, or how much cash it's generating in a year - they're going to assign a value to it.발음듣기
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And given that it's worth $5 million, and we think that it can sustain - it's only worth $5 million and there's no way that it can pay interest on $6 million of debt.발음듣기
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And then once you have a plan, then everyone has to vote on it, and there are things called cram downs - and we'll do that in more detail - but the plan will say, you know what?발음듣기
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So now, it can only handle $2 million of debt, and then there will be $3 million left of equity.발음듣기
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So let's just say for a second - and I want you to think about it - what is everyone's incentive?발음듣기
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They're most senior. And then all of these other $4 million, who are more junior - let me see if I can color it in.발음듣기
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I know it's hard to read - these other $4 million guys, instead of getting any kind of cash or any kind of debt securities for having been owed this money, they'll get the new stock.발음듣기
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You'll often see when a company goes into bankruptcy but it's getting reorganized, you'll often see some people start to buy up this debt or these bonds, right here, because they want to be the new equity holders.발음듣기
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When this company emerges from bankruptcy - let's say that this is how it emerges from bankruptcy - they want to be these guys, the new equity holders.발음듣기
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We want to assign as low a possible value to the company as possible - in this case $5 million - so that we make sure.발음듣기
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Hopefully the company ends up being worth $10 million again, in which case these guys right here make out like bandits, right?발음듣기
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If the company was really worth $10 million but the bankruptcy court values it at $5 million, these guys get all of the shares of the company.발음듣기
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So let's say the company emerges from bankruptcy like this, but it actually turns out there were $10 million.발음듣기
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So these guys - maybe they were owed $2 or $3 million before, and they got $3 million of the new equity, they might have made out like bandits.발음듣기
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They'll hire their own bankers. And their bankers, they'll probably submit a plan that says, no, no, no, no.발음듣기
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And of course, the first $6 million of the value - so the $4 million of debt, and then $2 million of the equity will go to the debt holders, right?발음듣기
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And then what's left over, which is essentially - so this is $2 million of equity, and then you'd have $2 million of equity here - this $2 million of new equity, right?발음듣기
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I know this gets a little confusing, but it all ends up being valuing the assets as you emerge from bankruptcy.발음듣기
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GM old goes to 0. But the assets keep operating, and that's why some people are a little bit misleading in this whole automotive bankruptcy debate.발음듣기
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They're kind of using scare tactics to say, oh, if GM goes bankrupt, then these assets are just going to disappear.발음듣기
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And then some of the unsecured, the more junior levels of debt, will probably lose some money.발음듣기
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