Don't look at the price action; that on its own is not surprising. Shares in near-bankrupt companies trade like options (because they are options - on the potential of recovery), with extreme volatility one would normally see in individual options contracts. The same way as bonds in near-bankrupt companies trade like stocks, largely ignoring remaining maturity, because very likely bonds will soon become stocks (wiping out the previous equity).
Look at the facts. Nobody has done this before:
> Jared Ellias, a law professor at the University of California Hastings College of Law, said he has studied hundreds of bankruptcies and never seen a company try to fund a case with an equity offering at the start of chapter 11.
> “Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring,” Mr. Elias said.
> “It is incredibly creative and they get props for that, but I wouldn’t buy those shares,” said Nancy Rapoport, a professor at UNLV’s William S. Boyd School of Law, who said she has never seen a bankruptcy funded this way. “I guess they’re trying to catch whatever the opposite of a falling knife is.”
On the other hand, what is fairly common is for companies to get saved out of bankruptcy by outside investment, in return for equity. This is a case of that with the oddity that it happened without contact between the company and the investors.
Interesting argument, but I think this is somewhat different.
A bankrupt company could always offer new equity to its existing creditors as part of a Chapter 11 reorganization plan, but that's not exactly a sale. If you're describing a transfer to outside investors, then the sale of new equity could violate fraudulent transfer law and the bankruptcy trustee could try to claw it back to preserve the value of the estate. (See Bankruptcy Code § 548).
It's worth mentioning that creditors can throw an insolvent company involuntarily into bankruptcy by petitioning the court. Since creditors don't share in the upside of a company (like equity holders do), there's no reason for the creditors to let the company linger in bankruptcy so that it can gamble for its resurrection. It's in their best interest for the company to enter bankruptcy as soon as possible so they can preserve its value and maximize their payouts.
There might be edge cases (e.g. if there's a single creditor who happens to have a significant equity stake, it could play out differently) but I don't think it's the norm.
Creditors may also share in the upside of the company if their bonds are currently way underwater, e.g. if your bonds are worth ten cents on the dollar you benefit from the company recovering all the way to 10x its value. Perhaps you should have forced it into bankruptcy earlier, but it's too late now. This isn't uncommon at all, as a poster upthread described "bonds in near-bankrupt companies trade like stocks".
In this case Hertz bonds trade around 40 cents on the dollar [0], so there's a significant incentive for the creditors to let the company gamble for some upside.
Yes and no. If a private equity firm injects a bunch of cash into a bankrupt company through an equity buy they do so with concessions, they might get one or two seats on the board of directors, a special clause in the bylaws in the event of a company sale or acquisition, etc. In this case these investors get none of that sort of 'armoring' of their risk.
>Don't look at the price action; that on its own is not surprising. Shares in near-bankrupt companies trade like options (because they are options - on the potential of recovery), with extreme volatility one would normally see in individual options contracts.
I get your point, but it's really not correct. Shares do not have delta, gamma, vega, strike price, implied volatility or any of the other factors that go into pricing options. They are not derivatives and there is no premium. Yes, a penny stock (which is what HTZ is at this point) has extreme volatility, but comparing them to options is way off. A share represents actual ownership in the company while an option does not until it is exercised (and is then no longer an option). By your example, any stock holding would be an option on the price of the stock going up, but it's not - you already own it.
Not entirely. Equity can be modelled as an option on a company’s assets, struck against its debt. This is fine for equity (and the equity component of fulcrum securities) in a bankruptcy.
If I rememberwell, this kind of strategy has a name called Captical structure arbitrage, where the most basic strategy is to traded convertible bonds. Most complex strategies include taking position on different asset class of the same company ( equity, bond and CDS).
Look at the facts. Nobody has done this before:
> Jared Ellias, a law professor at the University of California Hastings College of Law, said he has studied hundreds of bankruptcies and never seen a company try to fund a case with an equity offering at the start of chapter 11.
> “Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring,” Mr. Elias said.
> “It is incredibly creative and they get props for that, but I wouldn’t buy those shares,” said Nancy Rapoport, a professor at UNLV’s William S. Boyd School of Law, who said she has never seen a bankruptcy funded this way. “I guess they’re trying to catch whatever the opposite of a falling knife is.”