【導讀】11bankruptcy.Chapter7bankruptcy. DirectCosts. stakeholders.conflicts).theequityholders.rate.timetheyborrow.valueofequity.

　　

【正文】 bt (for example, junior and senior debt). ? The junior creditors also may be reluctant to force a firm into bankruptcy since their claims also have optionlike features. ? In many cases it may be in the interest of junior creditors to lend additional money to a firm in financial distress to keep it from going bankrupt. ? Though the new loan itself is not a good investment, it creates value for the existing debt. Emruss Industries Case ? Emruss Industries has no cash flow in the current period, but will have cash flows of $ million next year if the economy is favorable and $ million if the economy is unfavorable. Assume the firm is risk neutral and the risk free rate is zero. The debt of the firm includes a $1,000,000 senior debt obligation due next year with a $150,000 coupon payment due immediately. If the firm is liquidated immediately it will generate $ million. Emruss also borrowed money from a venture capitalist to whom it owes $200,000 due next year. The debt to the venture capitalist is junior to the $1 million senior debt. Emruss will be forced into bankruptcy if it can not meet its $150,000 million due immediately. In this case all the debt bee due immediately. The probability of good economy is . Debt Obligation Immediate Next Year Senior debt holders $150,000 $1,000,000 Venture capitalist 0 200,000 Payoffs in the Event of Liquidation ? When the firm is liquidated immediately, the payoffs to each claimers are as shown in the above table. ? In this case if Emruss promises to repay a face value of $250,000 next year, the venture capitalist is willing to provide Emruss with additional $150,000 to meet the debt obligation. ? The cash injection itself is a negative NPV project (250,000* 150,000). But it makes the existing debt more valuable. Payoff in the Event of Liquidation Senior debt holders $1,150,000 Venture capitalist 50,000 Equity holders 0 Payoffs in the Event of Cash Injection ? By investing 150,000 the venture capitalist creates value by $25,000 (*450,000 – 50 – 150,000) to himself. ? This investment is posed of two parts: ? Cash injection: 150,000 + 250,000* = $25,000 ? Value addition to existing debt: 200,000*,000 = $50,000 ? Cash injection is equivalent to buying a call option which has a payoff of $50,000 at a price of $25,000. Next Year States of Economy Immediate Favorable Unfavorable Senior debt holders $150,000 $1,000,000 $500,000 Venture capitalist 150,000 450,000 0 Equity holders 0 50,000 0 Keep Going by Issuing New Equity ? When there is no junior debt holders, equity holders also have the incentive to issue new equity to keep the firm going. ? Assume in the above case the pany does not have the debt obligation to the venture capitalist, will the shareholders be willing and able to issue equity to meet the immediate debt obligation, $150,000? ? New equity issuance is feasible: ? Assume if the new equity is issued, the number of new shares is α of the total number of shares. Then in good state new shareholders will get α(1,500,000 – 1,000,000) and in bad state 0. Therefore *α*500,000 = 150,000. α = . ? Existing equity holders prefer issuing equity to liquidating assets: ? By issuing new shares, existing shareholders obtain *(1α)*500,000 = 100,000. To liquidate the firm, they get 50,000 = (1,200,000 – 1,150,000). Chapter 11 Bankruptcy to Mitigate the Conflicts ? By declaring Chapter 11 bankruptcy, a firm is able to obtain additional debt financing (debtorinpossession (DIP)) that is senior to the existing debt. ? If the going concern value of a bankrupt firm is high, DIP financing makes the original debt holders better off and enhances the value of the firm because the weakening of the seniority of the existing debt allows the firm to do good investments. ? Compared to issuing an unsecured debt at the first place, the DIP financing allows the issuance of senior debt only in extreme case, which to a larger extent protects the existing debt holders. ? However if the liquidation value is high, the DIP financing could be used by equity holders or junior debt holders to continue inefficiently. Other Ways to Alleviate the Conflicts ? The simplest solution, ? Eliminating the debt holders: there is obviously no debt holder – equity holder conflicts for an all equity firm. ? Since debt has advantages, firms have incentives to use debt and design the debt in ways that minimize the conflicts between shareholder and debt holders. ? Protective covenants ? Bank and privately placed debt ? Short term debt instead of long term debt ? Security design ? Project financing ? Management pensation contracts Protective Covenants ? Shareholders should be motivated to control their incentive problems, since ultimately they must bear the costs that such problems create. ? Covenants provide a way to restrict the selfinterest behaviors and the violation of covenants incurs technical default, which means debt holders can require repayment even if interests are met. ? Disadvantage of protective covenants ? It is difficult to specify in the contract the exact types of investment that are allowed or forbidden. ? It is also costly to enforce the covenants especially when debt holders are diffuse. ? Excessive covenants reduce flexibility which is valuable to the firms. Protective Covenants ? Covenants on investment – grade versus noninvestment – grade debt, ? Firms issuing noninvestment – grade debt have lower credit rating and higher probability to default. The conflicts between shareholder and debt holders are therefore more severe. ? The noninvestment – grade debt have substantial covenants. ? Covenants can not solve all problem ? Debt overhang problem makes shareholders to pass up positive NPV project with low risk. ? Though it is possible to restrict the behavi