6. Financial distress and bancruptcy

1. 2. Institutional differences between financial distress and bancruptcy
   1. 3. Classficiation of recovery strategies
      1. Cash generative
         1. Cash conserving
            1. Cash depleting
               1. Non-cash impact
                  1. governance

                     Anmerkungen:

                     • Changing CEO/board
               2. Financial

                  Anmerkungen:

                  • Share repurchases
                  1. Asset

                     Anmerkungen:

                     • Acquisitions
            2. Operational

               Anmerkungen:

               • Cost rationalisation Layoffs
               1. Financial

                  Anmerkungen:

                  • Debt - equity swaps Dividend cut/omission Scrip dividend
         2. Operational

            Anmerkungen:

            • Increase cash, reduce costs
            1. Financial

               Anmerkungen:

               • Rasing debt/equity Debt refinancing
               1. Asset

                  Anmerkungen:

                  • Disposal,MBOs, sales and leaseback
   2. Bancruptcy
      1. Def

         Anmerkungen:

         • Court process designed to help costumersand business eliminate their debts or repay them under protectio of the bancruptcy court. Can be described as liquidation and reorganisations.
      2. International bancruptcy laws
         1. Asset allocation
            1. Asset allocation
               1. Secured claims
                  1. Debtor in possesion claims
                     1. Priority claims
                        1. General unsecured claims
                           1. Preferred stock
                              1. Common stock
2. Decline
   1. Symptons
      1. Absolute decline

         Anmerkungen:

         • Same as competitors. Wouldnt tell too much
         1. Relative decline

            Anmerkungen:

            • Measured agains benchmark
      2. Causes
         1. Financie

            Anmerkungen:

            • Mismatch between business and financial risk
            1. Strategy

               Anmerkungen:

               • Management Luck
   2. Financial distress
      1. Occurance

         Anmerkungen:

         • Occurs when promises are broken or honoured with difficulty
         1. Def

            Anmerkungen:

            • Flow based - insolvency: Operating cash flow are insufficient to cover contractually required payments
      2. Insolvency
         1. Def

            Anmerkungen:

            • The value of the asset is less than the value of the debt
         2. Identification of poor performers
            1. CAR

               Anmerkungen:

               • Sum of abnormal return abnormal returns = Raw ret - return on control firms (same industry) Excluding macro economic risk
               1. Credit ratings
                  1. Univariate
                     1. Multivariate
                        1. Z-score
                     2. Interest cover
      3. Different from economic distress

         Anmerkungen:

         • Financial distress - Profitable operations but wrong capital structure. Economic distress - Unprofitable operations.

Anmerkungen:

• A firm is financially distressed when its cash flow is not sufficient to satisfy its current obligation.

1. Financial risk

   Anmerkungen:

   • Leverage
   1. Business risk

      Anmerkungen:

      • Product Competition Firm specific Able to control
   2. Macro-economic risk

      Anmerkungen:

      • Interest rate Exchange Commodity
2. Lead to: