Valuation
Rock: The stated value of the equity is meaningless when dealing with an insolvent company. The key valuation metric to use here is a liquidation analysis, which compares the tangible market value of all the assets to the book value of all the debt. If the book value of the debt is higher than the tangible market value of all the assets, then the equity is effectively worthless (i.e., one of the legal definitions of insolvency).
Usually, the only upside here for equity is when another company is willing to pony up and buy the assets as a going concern, and the price they're willing to pay is higher than the proceeds that would be generated from a straight liquidation. Even here, though, the total proceeds from the sale need to be higher than the total debt in order for the equity holders to see any real benefit, unless the creditors consciously throw the equity holders a bone to ensure a consensual confirmation (e.g., usually < 2-3% of the new equity in the emergent company).
FWIW, in my experience, most companies never emerge from bankruptcy. The Chapter 11 cases simply convert to Chapter 7's (straight liquidation).
All of the above is strictly my opinion, of course. I have no position here, either long or short. I just hate to see fellow investors (especially good cyber-friends) lose money betting against house odds that are so heavily stacked against them.
Razor |
