What happens with the existing stocks of companies emerging from Chapter 11?

3 Responses to “What happens with the existing stocks of companies emerging from Chapter 11?”

1. TJ says:

   April 30, 2010 at 5:06 pm

   The "Q" at the end of a ticker indicates the company is in bankruptcy proceedings.
   http://www.bargaineering.com/articles/reading-nasdaq-ticker-symbols.html

   In most cases, the stock gets cancelled when the company emerges from bankruptcy. In most of those cases, the shareholders get nothing.

   Effectively what happens is that company creditors exchange their debt for an equity position in the reorganized company. Usually, there are not enough assets in the company to return equity to the shareholders.

   It is unusual for shareholders to retain some ownership, but it does happen. For example, when Mirant emerged from bankruptcy, existing shareholders received about 3-4% of the reorganized (down, of course, from the 100% it owned of the bankrupt company).

   Disposition of the existing shares is always covered in the plans of reorganization filed with the bankruptcy court.
2. Taranto says:

   April 30, 2010 at 5:06 pm

   There are different types of bankruptcy. If a firm is going to be liquidated, then it never emerges. The assets are sold off. Senior bondholders and banks get paid off first. Junior debtholders get paid next. Preferred stock-holders get paid of after all debt is paid. If there is anything left, it is distributed to the common stock-holders.

   Chapter 11 does not involve liquidation. In chapter 11, the managers are given the opportunity to restructure the firm. If they are unsuccessful, then they go into liquidation. For most firms, this is not the right choice. Bankruptcy protection allows the firm’s managers to keep control of the firm while it is being restructured.

   Debtholders are faced with negotiating with shareholders or waiting a long time to get their money (what is left of it). It is usually in their best interest to negotiate quickly and get out of bankruptcy as soon as possible. In fact, most firms do these negotiations before going into Chapter 11 to avoid the extra costs.

   The net result is that debtholders walk away with a large piece of the firm’s new equity and usually have a small debt investment as well. Because they were able to negotiate, the old equity holders usually walk away with something — usually a small share of the firm’s new equity. Shareholders do not usually emerge from Chapter 11 with nothing. If they are to get nothing, they will force liquidation instead.

   The average length of time in Chapter 11 is about 19 months.
3. humanresourcesman says:

   April 30, 2010 at 5:06 pm

   It works both ways sometimes depending. Some times the investors lose everything, other times they get reissued new shares. I like NWACQ right not but its a long shot.

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