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Post-Chapter 11 Bankruptcy Performance: Avoiding Chapter 22 |
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| Authors: | by Edward I. Altman with Tushar Kant Thongchai Rattanaruengyot |
| Affiliation: | Max L. Heine Professor of Finance at the NYU Stern School of Business (). He is the Director of the NYU Salomon Center's Research Program in Credit and Fixed Income Markets and Chairman of the Academic Advisory Council of the Turnaround Management Association.;Research Assistant at the NYU Salomon Center and then an analyst at GE Capital.;Associate with Lehman Brothers (Barclays), Hong Kong, and was a student at Stern when the original research for this paper began. He began his study at the Harvard Business School in fall 2009. |
| Abstract: | Despite the long experience in the U.S. with restructuring companies in bankruptcy, there remains a persistent tendency for companies to emerge from Chapter 11 with too much debt and too little profitability. In this article, the author uses a variant of his well-known "Z-Score" bankruptcy prediction model to assess the future viability of companies when emerging from bankruptcy, including the likelihood that they will file again—a surprisingly common phenomenon that is now referred to as "Chapter 22." The author reports that those companies that filed second bankruptcy petitions were both significantly less profitable and more highly leveraged than those that emerged and continued as going concerns. Indeed, the average financial profile and bond rating equivalent for the "Chapter 22" companies on emerging from their first bankruptcies were not much better than those of companies in default. The authors findings also suggest that a credible corporate distress prediction model could be used as an independent, unbiased method for assessing the future viability of proposed reorganization plans. Another potential application of the model is by the creditors of the "old" company when assessing the investment value of the new package of securities, including new equity, offered in the plan. |
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