Is Spandex Corporation worth it more dead or alive? That was the question the President of Falkner Investment Inc., o!ert Falkner was trou!led makin" a decision on. Spandex had !een facin" ne"ative earnin" and poor liquidit# conditions which resulted in severe financial distress for the past three #ears. o!ert invested in the compan# a!out nine #ears a"o, at the time the industr# outlook was "ood. Spandex has requested its creditors to !e "iven a chance to reor"ani$e and restructure. The compan# also vowed to put in their !est effort to steer the compan# !ack !a ck on the road to profita!ilit#. %owever, %owever, if the firm was forced to liquidate, there&s a possi!ilit# the current assets could !e sold for '() of the !ook value, also the fixed assets mi"ht !e a!le to !rin" in a!out *+ million. evertheless -() of the "ross proceeds would !e paid towards administrative fees and other char"es. Confused and indecisive, Falkner turned to his CF for help, hopin" he could shed some li"ht after reviewin" the financial statements of Spandex. Financial distress is a situation where a compan# cannot meet its financial dut# to its creditors. There are various wa#s, which a firm can find itself in financiall# distressed position. %avin" hi"h fixed costs, illiquid assets, and/or revenues that are sensitive to poor economic conditions are all wa#s a firm can find itself in financiall# distressed position. Spandex Corporation&s main pro!lems, which are resultin" their firm to !ecome financiall# distressed, are due to si"nificantl# lower profit mar"ins and declinin" demand due to competition and weak economic conditions. 0urin" the past three #ears Spandex Corporation has faced ne"ative earnin"s and poor liquidit# conditions. 1!solute priorit# rule also known as 2liquidation preference.2 is a rule that specifies the order of pa#ment in which creditors are paid !efore shareholders in the event of liquidation. In a case of !ankruptcies it is usuall# decided which participants will receive what portion of pa#ment. 0e!ts to creditors will !e paid first and shareholders divide what remains. If Spandex Corporation was to !e liquated it should First3 4iquidate its assets to cash, Second3 Pa# off de!t from cash reali$ed from sellin" of assets, Third3 Priorit# would !e to pa# senior creditors and shareholders receive whatever is left over. 1 plan for financial reor"ani$ation that a compan# prepares in cooperation with its creditors that will take effect once the compan# enters !ankruptc#. This plan must !e voted on !# shareholders !efore the compan# files its petition for !ankruptc#, and can result in shorter turnaround times. The idea !ehind a prepacka"ed !ankruptc# plan is to shorten and simplif# the !ankruptc# process in order to save the compan# mone# in le"al and accountin" fees, as well as the amount of time spent in !ankruptc# protection. The sooner the compan# can emer"e from !ankruptc#, the sooner it can implement its reor"ani$ation and return to "eneratin" revenues from its core operations. 5orkout6 1n informal process !# which Falkner Investments Inc. and Spandex Corporation a"ree a different repa#ment plan, an exchan"e of common stock for the ori"inal de!t in this case. 5orkout is part of a Chapter 77 !ankruptc# process, which is also called reha! ilitation !ankruptc#. eschedule/restructure6 It means a rearran"ement of the terms of the repa#ment, such as the interest rate and the loan period. It can also !e addin" an additional loan. 8xtension6 It means Spandex Corporation extent the time to su!mit a reor"ani$ation plan under a Chapter Chapte r 77 !ankruptc# process. Composition3 1n arran"ement !etween a !ankrupt and his creditors to finali$e the de!ts. The proposal would !e made, and creditors would vote on whether the# would accept it or not. The proposal would include an# asset that is availa!le to the creditors and the assets that will !e distri!uted at an equal rate. Spandex Corporation would meet with Falkner Investments Inc. and other creditors to vote on Spandex&s proposal. The report will provide detail of the assets, the comparison of different alternatives, and the fee and expenses.
9Cram down:3 Cram down is the process under Chapter 77 reor"ani$ation. If one or more creditors still have o!;ections. Cram down allows the !ankruptc# courts to modif# the loan terms and forces various creditors to accept terms that the# do not like and vote a"ainst. The court decision is attempt to !rin" a fair and a"reea!le result to most of the creditors. 1utomatic sta#3 It is the suspension of certain le"al actions !# creditors a"ainst a de !tor or the de!tor&s propert#. If Spandex Corporation file a petition automaticall# sta#s, Falkner Investments Inc. and other creditors cannot institute an# le"al action to collect de!ts over this period of time. 4iquidation is a form of !ankruptc# in which the de!tor&s nonexempt propert# is sold for cash, the cash is distri!uted to the creditors, and an# unpaid de!ts are dischar"ed. 1 trustee will !e appointed to sell the assets and distri!ute the cash collections to the creditors. The distri!ution will follow a specified priorit# rankin" of claimants. Spandex Corporation&s senior notes will "enerall# !e repaid !efore other creditors can receive an# pa#ment. eor"ani$ation is a form of !ankruptc# in which the de!tor "ets to keep all the propert#. The de!tor would reor"ani$e the compan# and a re
(= shares of new common stock for each *7((( face value of the senior de!t. nlike the senior de!t, common stock is put at the least of the priorit# of claims for an equita!le distri!ution of the de!tor@s assets amon" the creditors6 therefore, if the compan# fails after the reor"ani$ation and files the liquidation, Falkner Investment Inc. ma# not !e a!le to receive a pa#ment !efore other creditors. o!ert should vote for the reor"ani$ation plan. If the or"ani$ation is liquidated, it will have lose more than half of its assets as well as all of the investments, such as o!ert&s that have !een made. Aein" that their current assets equal *7'( million, if '() of its !ook value is what is sold then it will !e sold for *>' million instead. Since net fixed assets, which were -( million, are now "oin" for + million, the total assets are calculated to equal *+B million instead of *7( million, which it was. Take out -() of that due to the administration fees which equals *7>,((,((( and what Spandex corp. will !e liquidated for is *D','((,(((. That is more than half of what it was worth. o!ert should vote in favor !ecause he has a !etter chance of !reakin" even or slowl# "ainin" a profit over time on his investment if the compan# was to restructure itself rather than not.
