Is Spandex Corporation Worth It More Dead or Alive

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Is Spandex Corporation worth it more dead or alive? That was the question the President of
Falkner Investment Inc., Robert Falkner was troubled making a decision on. Spandex had
been facing negative earning and poor liquidity conditions which resulted in severe financial
distress for the past three years. Robert invested in the company about nine years ago, at
the time the industry outlook was good. Spandex has requested its creditors to be given a
chance to reorganize and restructure. The company also vowed to put in their best effort to
steer the company back on the road to profitability. However, if the firm was forced to
liquidate, there’s a possibility the current assets could be sold for 40% of the book value,
also the fixed assets might be able to bring in about $9 million. Nevertheless 20% of the
gross proceeds would be paid towards administrative fees and other charges. Confused and
indecisive, Falkner turned to his CFO for help, hoping he could shed some light after
reviewing the financial statements of Spandex.
Financial distress is a situation where a company cannot meet its financial duty to its
creditors. There are various ways, which a firm can find itself in financially distressed
position. Having high fixed costs, illiquid assets, and/or revenues that are sensitive to poor
economic conditions are all ways a firm can find itself in financially distressed position.
Spandex Corporation’s main problems, which are resulting their firm to become financially
distressed, are due to significantly lower profit margins and declining demand due to
competition and weak economic conditions. During the past three years Spandex
Corporation has faced negative earnings and poor liquidity conditions.
Absolute priority rule also known as "liquidation preference." is a rule that specifies the order
of payment in which creditors are paid before shareholders in the event of liquidation. In a
case of bankruptcies it is usually decided which participants will receive what portion of
payment. Debts to creditors will be paid first and shareholders divide what remains. If
Spandex Corporation was to be liquated it should First: Liquidate its assets to cash, Second:
Pay off debt from cash realized from selling of assets, Third: Priority would be to pay senior
creditors and shareholders receive whatever is left over.
A plan for financial reorganization that a company prepares in cooperation with its creditors
that will take effect once the company enters bankruptcy. This plan must be voted on by
shareholders before the company files its petition for bankruptcy, and can result in shorter
turnaround times. The idea behind a prepackaged bankruptcy plan is to shorten and simplify
the bankruptcy process in order to save the company money in legal and accounting fees,
as well as the amount of time spent in bankruptcy protection. The sooner the company can
emerge from bankruptcy, the sooner it can implement its reorganization and return to
generating revenues from its core operations.
Workout; An informal process by which Falkner Investments Inc. and Spandex Corporation
agree a different repayment plan, an exchange of common stock for the original debt in this
case. Workout is part of a Chapter 11 bankruptcy process, which is also called rehabilitation
bankruptcy.
Reschedule/restructure; It means a rearrangement of the terms of the repayment, such as
the interest rate and the loan period. It can also be adding an additional loan.
Extension; It means Spandex Corporation extent the time to submit a reorganization plan
under a Chapter 11 bankruptcy process.
Composition: An arrangement between a bankrupt and his creditors to finalize the debts.
The proposal would be made, and creditors would vote on whether they would accept it or
not. The proposal would include any asset that is available to the creditors and the assets
that will be distributed at an equal rate. Spandex Corporation would meet with Falkner
Investments Inc. and other creditors to vote on Spandex’s proposal. The report will provide
detail of the assets, the comparison of different alternatives, and the fee and expenses.

“Cram down”: Cram down is the process under Chapter 11 reorganization. If one or more
creditors still have objections. Cram down allows the bankruptcy courts to modify the loan
terms and forces various creditors to accept terms that they do not like and vote against. The
court decision is attempt to bring a fair and agreeable result to most of the creditors.
Automatic stay: It is the suspension of certain legal actions by creditors against a debtor or
the debtor’s property. If Spandex Corporation file a petition automatically stays, Falkner
Investments Inc. and other creditors cannot institute any legal action to collect debts over
this period of time.
Liquidation is a form of bankruptcy in which the debtor’s nonexempt property is sold for
cash, the cash is distributed to the creditors, and any unpaid debts are discharged. A trustee
will be appointed to sell the assets and distribute the cash collections to the creditors. The
distribution will follow a specified priority ranking of claimants. Spandex Corporation’s senior
notes will generally be repaid before other creditors can receive any payment.
Reorganization is a form of bankruptcy in which the debtor gets to keep all the property. The
debtor would reorganize the company and a re-arranged repayment plan is made and will be
repaid by the debtor. The length of reorganization is generally longer, and the process is
generally more expensive. If the company’s is successful after the reorganization, the
payment will be repaid; otherwise, the company will file the bankruptcy liquidation.
In this case, Spandex Corporation’s reorganization plan called for the exchange of 90.5805
shares of new common stock for each $1000 face value of the senior debt. Unlike the senior
debt, common stock is put at the least of the priority of claims for an equitable distribution of
the debtor's assets among the creditors; therefore, if the company fails after the
reorganization and files the liquidation, Falkner Investment Inc. may not be able to receive a
payment before other creditors.
Robert should vote for the reorganization plan. If the organization is liquidated, it will have
lose more than half of its assets as well as all of the investments, such as Robert’s that have
been made. Being that their current assets equal $140 million, if 40% of its book value is
what is sold then it will be sold for $84 million instead. Since net fixed assets, which were 20
million, are now going for 9 million, the total assets are calculated to equal $93 million
instead of $160 million, which it was. Take out 20% of that due to the administration fees
which equals $18,600,000 and what Spandex corp. will be liquidated for is $74,400,000.
That is more than half of what it was worth. Robert should vote in favor because he has a
better chance of breaking even or slowly gaining a profit over time on his investment if the
company was to restructure itself rather than not.

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