Bankruptcy & Corporate Restructuring

Swooping in to prey on dying animals, the vulture has become a metaphor for investors in bankruptcies

Corporate restructuring occurs when a business redesigns some aspect of itself. It can occur for many reasons and bankruptcy is among them. In a chapter 11 bankruptcy a company develops a restructuring plan which allows it to continue profitably. Creditors are partially paid back from earnings of the company rather than from a liquidation of the company's assets.

Potential Causes of Restructuring

There are many potential catalysts for a business to restructure itself. A business may have gotten too large and it may spin off a portion of itself. It may be purchased in a leveraged buy out. Or it may have run into difficulties and be in need of financial restructuring.

Types of Bankruptcy

There are many different types of bankruptcy but the two principal forms of bankruptcy for businesses are chapter 7 and chapter 13 bankruptcy. The types of bankruptcy are named after their chapter in the bankruptcy code itself. In a chapter 7 bankruptcy a business closes and ceases operations. This makes chapter 7 bankruptcy a form of liquidation in which creditors are paid from proceeds of the estate. Chapter 11 bankruptcy is a form of restructuring. Many chapter 11 bankruptcies convert into chapter 7 bankruptcies because their reorganization plans do not succeed.

The Bankruptcy Plan

A bankruptcy plan must be approved by the bankruptcy court. For the initial 120 days the business itself has the exclusive right to file a plan unless the debtor is a small business. Many stakeholders in the company have a voice in how the plan develops. The U.S. trustee appoints creditors committee which represents the interests of unsecured creditors. Bondholders, who are creditors, have a larger say in the formation of the plan than stockholders, who are equity holders.

Vultures

It has recently become common practice for certain types of investors to invest specifically in distressed companies. These investors have been termed vultures or vulture funds. The vulture funds hope that if they patiently wait for the right opportunity they will be able to buy debt cheaply and earn a high return on their investment.

Considerations

Different types of investors and lenders in a corporation will see differing affects from a bankruptcy. Secured creditors, which might be a bank who has a lien on property of a corporation will be in the best position to emerge from the bankruptcy without having a major loss of their principal while equity investors will be in the worst position in a bankruptcy. While reorganizations often fail some notable U.S. companies have emerged from bankruptcy successfully.

References

• Investopedia: An Overview of Corporate Bankruptcy
• Creating Value Through Corporate Restructuring:
• United States Courts: Chapter 11: Reorganization Under the Bankruptcy Code