Exam 17: Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Sales within the protection of Chapter 11 reorganization may be accomplished either by a negotiated private sale to a particular purchaser or through a public auction.

Legal insolvency occurs when a firm's liabilities exceed the book value of its assets.

Why would lenders be willing to lend to a firm emerging from Chapter 11? How did the lenders attempt to manage their risks? Be specific.

While bankrupt firms generally are unable to meet the listing requirements of the major stock exchanges,their shares may trade in the over-the-counter market.

All of the following are true about voluntary liquidations except for

If the going concern value is less than the selling or liquidation price,the firm should seek the protection of the bankruptcy court.

The filing of a petition triggers an automatic stay once the court accepts the request,which provides a period suspending all judgments,collection activities,foreclosures,and repossessions of property by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.

A firm is said to be bankrupt once it defaults on a bond payment.

A firm is said to be technically solvent when it is unable to pay its liabilities as they come due.

What alternative restructuring strategies do you believe may have been considered for GM? Of these,do you believe that the 363 sale in bankruptcy represented the best course of action? Explain your answers.

If a firm enters into a workout in which a voluntary negotiated agreement with debtors is achieved,the firm may lose its right to claim NOLs in its tax filing.

If the selling price of the failing firm is less than the going concern and liquidation value,the firm should sell the firm to another party.

In view of the substantial loss of jobs,as well as wage and benefit reductions,do you believe that firms should be allowed to reorganize in bankruptcy? Explain your answer.

U.S.bankruptcy laws and practices focus on maintaining shareholder value during the bankruptcy process.

Through a process called an assignment,a committee representing creditors grants the power to liquidate the firm's assets to a third party called an assignee or trustee.

Which of the following are commonly used strategic alternatives for failing firms?

PG&E SEEKS BANKRUPTCY PROTECTION Pacific, Gas, and Electric (PG&E), the San Francisco-based utility, filed for bankruptcy on April 7, 2001, citing nearly $9 billion in debt and un-reimbursed energy costs. The utility, one of three privately owned utilities in California, serves northern and central California. The intention of the Chapter 11 reorganization was to make the utility solvent again by protecting the firm from lawsuits or any other action by those who are owed money by the utility. The bankruptcy will also allow the utility to deal with all of the firm's debts in a single forum rather than with individual debtors in what had become a highly politicized venue. The following time line outlines the firm's road to bankruptcy. . Utility industry analysts saw PG&E's move as largely an effort to escape the political paralysis that had befallen the state's regulatory apparatus. The bankruptcy filing came one day after Governor Davis dropped his opposition to raising retail rates. However, the Governor's reversal came after five month's of negotiations with the state's privately owned utilities on a rescue plan. PG&E's common shares fell 37 percent on the day the firm filed for reorganization. Fearing a similar fate for San Diego Gas and Electric, the shares of Sempra Energy, SDG&E's parent corporation, also dropped by 35 percent In an attempt to insulate California ratepayers from escalating wholesale electricity prices, the state entered into a series of 5-to-10 year contracts with electricity power generators that account for more than two-thirds of the state's projected power needs. The last contracts were signed by the state in June 2001. By September, a slowing economy pushed the wholesale price of electricity well below the level the state was required to pay in the "take or pay" contracts the state had just signed. Estimates suggest that California taxpayers will have to pay between $40 and $45 billion in power costs over the next decade depending on what happens to future energy costs. PG&E has continued to supply its customers without disruption or blackout while being under the protection of the bankruptcy court. Southern California Edison, nearing bankruptcy for reasons similar to those that drove PG&E to seek protection from its creditors, reached agreement with the Public Utility Commission to pay off $3.3 billion in debt owed to power generators from customer revenues. Previously, the PUC had forbid the utility to use monies generated from two previous rate increases for this purpose. The U.S. District Court judge approved the plan on October 5, 2001. While some creditors complained that the settlement was not reassuring because it did not include a timetable for repayment of outstanding debt, others viewed the agreement as a voluntary reorganization plan without going through the expensive process of filing for bankruptcy with the federal court. : -In your judgment,did regulators attenuate or exacerbate the situation? Explain your answer.

Smaller creditors have little incentive to attempt to hold up the agreement unless they receive special treatment.

A debt-for-equity swap occurs when the distressed firm's shareholders are willing to surrender a portion of their ownership for debt in the firm.

If the insolvent firm is willing to accept liquidation,,legal proceedings are not necessary,regardless of what the creditors think.