Series 79 - Unit 12 - Distressed Companies

Which chapter in the bankruptcy code would allow the company and its board of directors to continue to operate the company while in bankruptcy? A) Chapter 11 B) Neither Chapter 7 nor 11 C) Both Chapter 7 and 11 D) Chapter 7

A Chapter 11 under the bankruptcy code allows the business to continue under current management as debtors in possession. They continue to operate the business and submit a reorganization plan.

The bankruptcy code offers several ways to declare bankruptcy. Most insolvent companies declare bankruptcy under A) Chapter 7 (liquidation) and Chapter 11 (reorganization). B) Chapter 7 (reorganization) and Chapter 11 (liquidation). C) Chapter 11 (reorganization). D) Chapter 7 (reorganization).

A Most companies declare one of two types (classified by their chapter in the bankruptcy code): Chapter 7 (liquidation) or Chapter 11 (reorganization).

Concerning a Section 363 bankruptcy sale, all the following are true except A) Section 363 of the bankruptcy code allows the debtor, acquirer (usually a large creditor), and the majority of shareholders to approve an asset purchase agreement for quick sales of a company's assets. B) A buyer can select the assets it wants to purchase free and clear of any liens. C) The bankruptcy court will approve the sale process and approve the winning bidder. D) With court approval, a stalking horse is a frequently used provision for the initial bidder.

A Once in bankruptcy under Section 363 of the bankruptcy code, the debtor and acquirer (a major creditor) do not need shareholder approval to sell the company's assets.

To prevent bidders from exploiting the situation of a distressed seller in a bankruptcy, the creditors committee may appoint which of the following? A) A senior debtor in possession B) A stalking horse bidder C) Creditors committee chairperson D) A trustee

B A stalking horse bidder, after conducting due diligence, would establish a bid that would act as the floor price in any auction for the assets to be sold.

The judge of a bankruptcy proceeding decides to issue a cramdown. This would occur if A) the creditor committee consisting of the largest seven unsecured creditors approve. B) there is dissension between the creditors in accepting the plan; the court can still accept it if a class of noninsider, impaired creditors accepts the plan. C) impaired creditors who do not approve a liquidation plan open the door for a judge to liquidate assets over the objections of the other creditors. D) there is dissension between the creditors in accepting the plan; only a U.S. Trustee can accept the plan.

B If there is dissension between the creditors in accepting the plan, it can still be accepted by the court if a class of noninsider, impaired creditors accepts the plan. This is referred to as a cram down because the dissenting creditors are forced to accept the plan.

The benefit(s) to a distressed company for having a stalking horse in a 363 sale is(are) - a base price is set. - favorable bids are attracted. - minimum increments for additional bids. - bid deadlines are more aggressive. A) I, II, and III B) I and II C) I only D) I, II, III, and IV

B Stalking horses are initial bids in a 363 sale. Because they establish the first bid, only higher bids will be offered. Conversely, having a stalking horse tends to have minimum bid increments and shorter deadlines for bids, causing fewer potential buyers from entering the sale.

If an indenture has a closed-end provision, this means A) additional issues have no lien on the revenue stream. B) additional issues will have junior liens. C) a sinking or surplus fund must be established. D) the bonds must be called before maturity.

B These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.

When a firm is liquidated in connection with a Chapter 7 bankruptcy, not all securities are treated equally. Different classes of securities have different levels of priority. What is the correct order of priority from most senior to lowest? A) Suppliers, senior debt, senior subordinated debt, preferred stock, convertible debt, common stock B) Senior debt, senior subordinated debt, suppliers, convertible debt, preferred and common stock C) Senior subordinated debt, senior debt, convertible debt, suppliers, preferred and common stock D) Suppliers, senior subordinated debt, senior debt, convertible debt, preferred and common stock

B When a firm is liquidated in connection with a Chapter 7 bankruptcy, different classes of securities have different levels of priority. The priority of each class of security is senior secured creditors (senior debt lenders), junior secured creditors (senior subordinated debt), unsecured creditors (trade suppliers), mezzanine (convertible debt), preferred stock, and common stock.

Under Section 363 of the bankruptcy code, which of the following is(are) true of asset sales made while in bankruptcy? - Majority shareholder approval is not required. - Assets sold will be free and clear of liens and encumbrances. I- nterested parties have time to object to the asset sale. - A motion must be filed with the bankruptcy court for its approval of the asset sale. A) II, III, and IV B) I, II, and III C) I, II, III, and IV D) I only

C

Under Chapter 7 of the bankruptcy code, who handles the liquidation of the estate's assets? A) Creditors committee B) Debtor in possession C) Trustee D) Judge

C Bonds are often issued with an indenture in order to appoint a trustee to administer a debt service reserve fund in the event of a budgetary crisis. Alternatively, a trustee may supervise the liquidation of an estate.

In order for a company in distress to continue, they choose a Chapter 11 reorganization plan. Which of the following must be enacted in the plan's structure? - All creditors must be separated into different classes. - The plan must provide for all creditors to be paid in full. - In order for the plan to be accepted, the plan must be approved by the non-insider creditors. - A class of impaired creditors must approve the plan with court approval. A) I and II B) II and III C) I, II, III, and IV D) II, III, and IV

C The reorganization plan separates creditors into classes such as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders. Because all creditors may not be completely paid, those whose claims will not be paid completely are considered impaired. In order for the plan to be accepted, it must be approved by the non-insider creditors. An entire class of creditors is deemed to have accepted the plan if the creditors holding two-thirds of the principal of the class's claims, and at least half of the claimants accept the plan.

A stalking horse is best described as A) a third-party creditor attempting to purchase a company's assets out of bankruptcy. B) a market-maker arranging for the trading of the distressed company's assets. C) a white knight trying to purchase a distressed company's assets before it files for bankruptcy. D) a buyer (usually a creditor creditor), providing a minimum bid to purchase a company's assets in bankruptcy.

D A stalking horse is a potential buyer (usually a major creditor) trying to purchase a company's assets in a bankruptcy proceeding. They will set the base price for the sale and hopefully will attract more favorable bids.

Which of the following statements best describes a company that has filed for bankruptcy? A) The risk of being a common shareholder, not receiving any payments from liquidation, is balanced with its low rate of return. B) While Chapter 7 allows individuals and partnerships to have a fresh start, no such provision is given to corporations. C) Senior secured credit holders are paid before general creditors. D) During a liquidation, unpaid wages, back taxes, and general creditors are paid before any security holder.

D In a bankruptcy liquidation, unpaid wages, back taxes, and general creditors are paid before any security holder. General creditors are paid before senior secured credit holders. Chapter 7 allows only individuals to have a fresh start. It is unlikely common shareholders will recoup their investments because they have the lowest seniority during a liquidation. This risk is one reason why the required rate of return on common stock is generally higher than for any other security.

Which of the following securities is considered the most junior? A) Debenture B) Prior lien preferred stock C) Mortgage bond D) Common stock

D In the event of a company's bankruptcy, common stock owners have the lowest priority in claims against corporate earnings and assets. This identifies common stock as the most junior security.

Which of the following protects the interests of creditors in the event of a bankruptcy? A) Shareholders committee B) SIPC Trustee C) Debtor in possession D) Creditors committee

D The creditors form their own committee, known as the creditors committee, to represent their interests. The committee's primary interest is to recover as much money as possible from the company filing for bankruptcy.

Which chapter in the bankruptcy code would involve a liquidation of the business? A) Both Chapter 7 and 11 B) Chapter 11 C) Neither Chapter 7 nor 11 D) Chapter 7

D Under Chapter 7, a trustee is appointed to liquidate the business.