Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

I think some people pay too much attention to the percentage of the company that is or is not in bankruptcy. It really doesn't matter if 95% or only 5% of the company is in bankruptcy as far as what happens to the equity holders. If you hold stock in the holding company and the final plan does not provide for a recovery for equity holders then that is the end of it.

How the value of the estate is derived will depend on whether it is a chapter 7, liquidating chapter 11 or a reorganizing chapter 11. In the liquidation proceedings the value distributed to the remaining constituencies will be a result of the sale of assets in the marketplace. If anything is left over after paying all creditors and administrative claims, then equity gets the rest.

In a reorganizaton proceeding, the value of the enterprise might be some agreed upon blend of recent financial performance and future projected financial performance and/or a discounted cash flow analysis. In a reorganization, you can almost always throw historical book values and current balance sheet composition out the window in determining value. The earnings potential of the reorganized company is what rules the day. Typically EBITDA or EBITDAR are multiplied by some multiple that is derived from several factors including but not limited to comparable companies analysis and the debt/EBITDA ratio. After you determine the enterprise value (EV), you deduct the value of all claims and add back distributable cash to arrive at the amount that remains to distribute to equity.