Not all business entities enjoy a successful start up period, as many new business projects fail. Apart from that a lot of the established companies run into trouble, for a number of reasons including erosion of customer base, bad investments, a down turn in a given industry and many more.
The bankruptcy legislation in the USA is quite lenient in comparison with other developed countries. This is the main reason for a large number of post-bankruptcy emergences in America. The airline sector can serve as a great example - companies disappear and returns, the latest examples being Delta and Northwest (See: http://online.wsj.com/article/SB117792554117386751-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month . Still, the whole process associated with seeking Chapter 11 protection is painful for the management, employees, creditors and stockholders. To put it clear or even blatantly - every one tries to avoid if possible. What can financially troubled firms do then?
There's a lot out there...
"In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization -- a painful experience for employees, creditors and shareholders alike -- are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the perfect deal - troubled companies get the time and means to turnaround their business, and lenders, mostly investment banks and hedge funds, get a nice risk premium on the loans amounting to a couple percent over the LIBOR rate. The whole process is so easy because "There's a lot of money out there" (From: http://online.wsj.com/article/SB118161526044432160.html). As mentioned above - corporate bankruptcies are at decade low. Everything seems perfect, does it not?
Shaky grounds
"When rescue lending fails, the extra debt can make a bust just more spectacular" (See: http://online.wsj.com/article/SB118161526044432160.html). The head of restructuring and recapitalization at the investment bank Jeffries & Co puts it this way in a quote for the Wall Street Journal: "To quote Alan Greenspan, there's some irrational exuberance on the part of investors." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the investors did not learn much on the rise and fall of junk bonds in the 1980', or the recent sub-prime mortgage sector failure (An interesting view on that: http://online.wsj.com/article/SB118212541231038534-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month). A rational investor has to remember to asses the risk of an investment and measure the benefits on the risk adjusted basis. Private equity firms, as well as investment banks or hedge funds may have a lot of capital, which does not mean they should just throw it away! Hopefully, rescue financing will stay a useful investment/financing tool and not a symbol of the next big slump.
The bankruptcy legislation in the USA is quite lenient in comparison with other developed countries. This is the main reason for a large number of post-bankruptcy emergences in America. The airline sector can serve as a great example - companies disappear and returns, the latest examples being Delta and Northwest (See: http://online.wsj.com/article/SB117792554117386751-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month . Still, the whole process associated with seeking Chapter 11 protection is painful for the management, employees, creditors and stockholders. To put it clear or even blatantly - every one tries to avoid if possible. What can financially troubled firms do then?
There's a lot out there...
"In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization -- a painful experience for employees, creditors and shareholders alike -- are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the perfect deal - troubled companies get the time and means to turnaround their business, and lenders, mostly investment banks and hedge funds, get a nice risk premium on the loans amounting to a couple percent over the LIBOR rate. The whole process is so easy because "There's a lot of money out there" (From: http://online.wsj.com/article/SB118161526044432160.html). As mentioned above - corporate bankruptcies are at decade low. Everything seems perfect, does it not?
Shaky grounds
"When rescue lending fails, the extra debt can make a bust just more spectacular" (See: http://online.wsj.com/article/SB118161526044432160.html). The head of restructuring and recapitalization at the investment bank Jeffries & Co puts it this way in a quote for the Wall Street Journal: "To quote Alan Greenspan, there's some irrational exuberance on the part of investors." (From: http://online.wsj.com/article/SB118161526044432160.html).
Seems like the investors did not learn much on the rise and fall of junk bonds in the 1980', or the recent sub-prime mortgage sector failure (An interesting view on that: http://online.wsj.com/article/SB118212541231038534-search.html?KEYWORDS=bankruptcy+emergence&COLLECTION=wsjie/6month). A rational investor has to remember to asses the risk of an investment and measure the benefits on the risk adjusted basis. Private equity firms, as well as investment banks or hedge funds may have a lot of capital, which does not mean they should just throw it away! Hopefully, rescue financing will stay a useful investment/financing tool and not a symbol of the next big slump.
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