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

                     Nota:

                     • Changing CEO/board
               2. Financial

                  Nota:

                  • Share repurchases
                  1. Asset

                     Nota:

                     • Acquisitions
            2. Operational

               Nota:

               • Cost rationalisation Layoffs
               1. Financial

                  Nota:

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

            Nota:

            • Increase cash, reduce costs
            1. Financial

               Nota:

               • Rasing debt/equity Debt refinancing
               1. Asset

                  Nota:

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

         Nota:

         • 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

         Nota:

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

            Nota:

            • Measured agains benchmark
      2. Causes
         1. Financie

            Nota:

            • Mismatch between business and financial risk
            1. Strategy

               Nota:

               • Management Luck
   2. Financial distress
      1. Occurance

         Nota:

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

            Nota:

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

            Nota:

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

               Nota:

               • 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

         Nota:

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

Nota:

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

1. Financial risk

   Nota:

   • Leverage
   1. Business risk

      Nota:

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

      Nota:

      • Interest rate Exchange Commodity
2. Lead to: