Michael Perelman writes: >> David, why do such companies as you described need a takeover to give the >> debtors a >> haircut? One example in the story is a company that tries to do an IPO only >> 3 weeks >> after the takeover.
There is no inherent need for a takeover. The paradigmatic reorganization is that the equity negotiates a debt restructure that delays bond payments, reduces interest, etc., to fit the company's cash flow. However, imagine that the original bond holders have sold their bonds at a large discount to a buyer of distressed bonds (aka vulture funds). Those guys are not looking for a restructured bond and future payments, they are looking for a cash payment as soon as possible for as much profit over the discounted purchase price. If they don't get what they want, they will block the reorganization and force a liquidation (which effectively means a sale of the assets), which will wipe out the equity (but payoff the bonds at some percentage). This forces the equity to payoff the bonds (at the negotiated haircut amount), which requires present capital as opposed to future capital. There are two ways to do that. Equity can go to the debt market, or the equity market. Debt allows existing equity to retain control, but leaves a big liability on the balance sheet (and you can imagine the terms an insolvent debtor is likely to obtain when it borrows). Alternatively, equity can sell out to a private equity fund that will payoff the bonds, but will take majority control of the equity. David
