Sold all my shares, my decision was due my complete ignorance about Chapter 11, please read the article
Be Wary of Investing in Chapter 11 Cos.
Wednesday November 15, 3:22 pm ET
By Stan Choe, AP Business Writer
Companies in Chapter 11 May Seem Like Cheap Buying Opportunities, but Experts Warn Against It
NEW YORK (AP) -- One of the hottest companies in the hot airline industry is one that actually warns investors away from its shares.
Since Nov. 2, shares of Delta Air Lines Inc. have soared about 60 percent. Of course, that only means they're up about 60 cents.
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Delta shares had been trading under $1 in early November, as the nation's No. 3 carrier restructures in Chapter 11 bankruptcy protection. But a profitable third quarter, aided by a one-time gain, and an $8 billion bid by US Airways Group Inc. helped pump the stock up to $1.60 in Wednesday afternoon over-the-counter trading.
Investors jumped into the stock despite Delta's warnings that its shares will likely be worthless at the end of its bankruptcy process. US Airways' bid, too, likely would mean nothing for Delta shareholders; the offer would mean cash and stock for Delta's creditors but not its equity holders.
It's typical for shareholders to be left with nothing following a Chapter 11 reorganization. In such proceedings, shareholders are typically last in the priority line in the division of assets. They're behind bondholders, suppliers and other creditors.
Delta itself told holders of its stock options that "a loss of equity value is one of the unfortunate, but practically unavoidable, consequences of a bankruptcy filing."
The company is just one of many voices urging investors to steer clear.
Analysts hold "Sell" or "Underweight" ratings. In a research note, Calyon Securities analyst Ray Neidl wrote that investors should take advantage of any rally in Delta's stock and sell it "since we expect the stock will remain worthless."
The Securities and Exchange Commission has a lengthy warning to investors about investing in companies operating in bankruptcy. In bolded text on its Web site, the SEC warns, "in most instances, the company's plan of reorganization will cancel the existing equity shares."
So, who are these investors drawn to seemingly certain losers?
"They're mainly naive unsophisticated investors who think this is a stock that may have traded for $50 and now it trades for 4 cents and maybe it will go up to a half dollar," said Ben Branch, a finance professor.
A faculty member at the University of Massachusetts Amherst's Isenberg School of Management, Branch co-wrote a study about the dangers of investing in bankrupt companies' stocks.
George Putnam III, the editor of a newsletter focusing on stocks in bankruptcy and in turnaround situations, said that in rare occasions, some of the investors are more sophisticated hedge funds.
The funds normally focus on the debt of companies in Chapter 11 bankruptcy protection, which has a better chance of getting a return, said the editor of the Turnaround Letter.
But they sometimes will invest in the stock of companies likely to repay creditors in full, leaving something left over for stockholders. Such companies, though, are rare.
"Ultimately, almost all of them will end up being either worthless or almost worthless, with only a handful of exceptions each year," Putnam said.
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