Bankruptcy

Question 1

Answer 1

1. Administrative expenses associated with liquidation
2. New claims approved by bankruptcy court after the filing
3. Wages, salaries, and commissions to employees
4. Employee benefit plan
5. Consumer claims
6. Tax claims
7. Senior debtholders
8. Junior debtholders
9. Preferred stockholders
10. Common stockholders

Question 2

Answer 2

In the slides, it states:

• “Altman (1984): Both direct and indirect costs are frequently greater than 20% of firm value”
• “Other studies: Total costs between 10-20% of firm value”
• DIRECT COSTS: “Weiss (1990): 3.1% of total value for large companies and 25-30% of total value for small firms”

This leads me to some confusion, between choices ‘C’ (10-20%) and ‘D’ (20-50%).

I believe if it is a LARGER firm, I would be more inclined to choice ‘C’, but if it is a smaller firm, it would be ‘D’.

Question 3

Answer 3

c. Default without distress
d. Default without bankruptcy
e. Distress without bankruptcy
f. Distress without default

Basically, you can have default or distress exclusive of bankruptcy, but bankruptcy entails both.

Question 4

Which senior debt claims on Horizon Lines were obvious targets for renegotiation? How can some senior creditors find themselves in a much weaker position than other senior creditors?

Answer 4

If Horizon was to restructure, the Chapter 11 would start with those. restructured claims.

Question 5

The CEO of Horizon says: “relative ease of predicting Chapter 11 outcomes and a small number of debt issues concentrated in the hands of a few creditors are the two main factors that contributed to a successful reorganization of Horizon Lines’ liabilities.” Do you agree? Why do these factors matter?

Answer 5

For such a highly leveraged company operating in a strategically important industry as international shipping, the new CEO’s best option in this case would be to seek legal intervention, using political support for U.S. shipping companies as backing to receive favorable Chapter 11 restructuring within the courts

Question 6

Describe the epilogue of the Horizon Lines reorganization.

• What instruments did restructuring involve?
• Which debt claims were paid down?
• Which were exchanged for other securities?
• What new securities were issued, and who bought them?