Corporate Financial Distress, Restructuring, and Bankruptcy

Analyze Leveraged Finance, Distressed Debt, and Bankruptcy

Edward I. Altman, Edith Hotchkiss, Wei Wang

• Publisher: Wiley
• Year: 2019
• Print ISBN: 9781119481805
• eBook ISBN: 9781119481850
• Edition: 4
• Topic: Business
• Subtopic: Finance
• Index: Business

A comprehensive look at the enormous growth and evolution of distressed debt markets, corporate bankruptcy, and credit risk models

This Fourth Edition of the most authoritative finance book on the topic updates and expands its discussion of financial distress and bankruptcy, as well as the related topics dealing with leveraged finance, high-yield, and distressed debt markets. It offers state-of-the-art analysis and research on U.S. and international restructurings, applications of distress prediction models in financial and managerial markets, bankruptcy costs, restructuring outcomes, and more.

PART One
The Economic and Legal Framework of Corporate Restructuring and Bankruptcy

CHAPTER 1
Corporate Financial Distress: Introduction and Statistical Background

Corporate financial distress, and the legal processes of corporate bankruptcy reorganization (Chapter 11 of the Bankruptcy Code) and liquidation (Chapter 7 of the Bankruptcy Code), has become a familiar economic reality to many U.S. corporations. The business failure phenomenon received some exposure during the 1970s, more during the recession years of 1980–1982 and 1989–1991, heightened attention during the explosion of defaults and large firm bankruptcies in the 2001–2003 post‐dotcom period, and unprecedented interest in the 2008–2009 financial and economic crisis period. Between 1989 and 1991, 34 corporations with liabilities greater than $1 billion filed for protection under Chapter 11 of the Bankruptcy Code; in the three‐year period from 2001 to 2003, 102 of these “billion‐dollar‐babies” with liabilities totaling $580 billion filed for bankruptcy protection; and from 2008 to 2009, 74 such companies filed for bankruptcy with an unprecedented amount of liabilities totaling over $1.2 trillion.

The line‐up of major corporate bankruptcies was capped by the mammoth filings of Lehman Brothers ($613 billion in liabilities), General Motors ($173 billion in liabilities), CIT Group ($65 billion in liabilities), and Chrysler ($55 billion in liabilities) during the 2008–2009 financial crisis. In fact, the total amount of liabilities of these four mega cases accounted for 75% of the liabilities of all billion‐dollar firms filing for bankruptcy from 2008 to 2009. Three other mega cases from the 2001–2003 period also make the list of the top 10 largest filings, including Conseco ($56.6 billion in liabilities), WorldCom ($46.0 billion) and Enron ($31.2 billion—or, almost double this amount if one adds in Enron's enormous off‐balance liabilities, making it the fourth “largest” bankruptcy in the United States). We note that it is most relevant to discuss the size of bankruptcies in terms of liabilities at filing rather than assets. For example, WorldCom had approximately $104 billion in book value of assets, but its market value at the time of filing was probably less than one fifth of that number. General Motors had $91 billion in book value of assets, but liabilities amounting to $172 billion. It is the claims against the bankruptcy estate, as well as the going‐concern value of the assets, that are most relevant in a bankrupt company. Firm size is no longer a proxy for corporate health and safety. Figure 1.1 shows the number of Chapter 11 filings and prepetition liabilities of firms with at least $100 million in liabilities from 1989 to 2017 (the mega cases). Figure 1.2 lists the top 40 largest bankruptcy filings of all time by the total amount of liabilities. Figure 1.3 lists the top 40 largest bankruptcy filings of all time by Consumer Price Index adjusted total amount of liabilities (in constant 2017 dollars).

Year	Number of Filings	Prepetition Liabilities ($ millions)	Number of Filings ≥ $1B	≥$1B/Total Filings (%)
1989	23	34,516	10	43
1990	35	41,115	10	29
1991	53	82,424	12	23
1992	38	64,677	14	37
1993	37	17,701	5	14
1994	24	8,396	1	4
1995	32	27,153	7	22
1996	33	11,949	1	3
1997	36	18,866	5	14
1998	55	31,913	6	11
1999	107	70,516	19	18
2000	137	99,091	23	17
2001	170	229,861	39	23
2002	136	338,176	41	30
2003	102	115,172	26	25
2004	45	40,100	11	24
2005	36	142,950	11	31
2006	34	22,775	4	12
2007	38	72,338	8	21
2008	146	724,222	24	16
2009	233	603,120	49	21
2010	114	56,835	14	12
2011	84	109,119	7	8
2012	69	71,613	14	20
2013	66	39,480	11	17
2014	59	91,992	14	24
2015	70	79,841	19	27
2016	98	125,305	37	38
2017	91	121,079	24	26
Mean No. of Filings, 1989–2017	76		16	21
Median No. of Filings, 1989–2017	59		12	21
Median No. of Filings, 1998–2017	88		17
Mean Liabilities, 1989–2017		$120,424
Median Liabilities, 1989–2017		$71,613

FIGURE 1.1 Chapter 11 Filing Statistics (1989–2017)

Source: Altman and Kuehne (2018b) and Salomon Center.

Company	Liabilities	Filing Date
Lehman Brothers Holdings, Inc.	613,000	9/15/2008
General Motors Corp.	172,810	6/1/2009
CIT Group, Inc.	64,901	11/1/2009
Conseco, Inc.	56,639	12/2/2002
Chrysler, LLC	55,200	4/30/2009
Energy Future Holdings Corp.	49,701	4/29/2014
WorldCom, Inc.	45,984	7/21/2002
MF Global Holdings Ltd.	39,684	10/31/2011
Refco, Inc.	33,300	10/5/2005
Enron Corp.	31,237	12/2/2001
AMR Corp.	29,552	11/...

Table of contents

• Cover
• Table of Contents
• About the Authors
• Acknowledgments
• Preface
• PART One: The Economic and Legal Framework of Corporate Restructuring and Bankruptcy
• PART Two: High‐Yield Debt, Prediction of Corporate Distress, and Distress Investing
• References
• Author Index
• Subject Index
• End User License Agreement