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

                     Annotations:

                     • Changing CEO/board
               2. Financial

                  Annotations:

                  • Share repurchases
                  1. Asset

                     Annotations:

                     • Acquisitions
            2. Operational

               Annotations:

               • Cost rationalisation Layoffs
               1. Financial

                  Annotations:

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

            Annotations:

            • Increase cash, reduce costs
            1. Financial

               Annotations:

               • Rasing debt/equity Debt refinancing
               1. Asset

                  Annotations:

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

         Annotations:

         • 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

         Annotations:

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

            Annotations:

            • Measured agains benchmark
      2. Causes
         1. Financie

            Annotations:

            • Mismatch between business and financial risk
            1. Strategy

               Annotations:

               • Management Luck
   2. Financial distress
      1. Occurance

         Annotations:

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

            Annotations:

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

            Annotations:

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

               Annotations:

               • 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

         Annotations:

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

Annotations:

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

1. Financial risk

   Annotations:

   • Leverage
   1. Business risk

      Annotations:

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

      Annotations:

      • Interest rate Exchange Commodity
2. Lead to: