Summary:The panel addressed topics related to the challenges presented to companies by an inappropriate capital structure. Other issues include the benefits and motivation for going through the processes associated with Chapter 11 bankruptcy in the U.S. Ultimately, that process is more likely to be the end of the beginning, rather than the beginning of the end, for a company with a strong reason to continue operations. It is difficult to successfully restructure the balance sheet of a company that does not have a reason to exist beyond its hard assets, said Bettina Whyte. Robert Klyman concurred that there must a business around which reorganization can occur in order for the process to be successful in the long run.
Klyman took issue with the comment made by Myron Scholes on the Nobel panel that bankruptcy leads to inefficiency. Klyman believes that bankruptcy levels the playing field for creditors and looks at each creditor equally, on the whole, in the process. More recently, with pre-packaged or pre-negotiated bankruptcy filings, firms lose very little time away from operations, making the process of restructuring the upper half of the balance sheet less of a distraction from the business at hand. Klyman points out that "pre-packs," as they are called, are best suited for companies whose bond debt exceeds their trade debt. Otherwise, long term restructuring will be required.
William Derrough points out that Chapter 11, which is not available in most other countries in the world, provides for the preservation of assets and jobs in the U.S. economy even during difficult times. That procedure keeps the operating company intact, even if parts of the company need to be sold as separate going concerns. Equally important though, is for a company to eliminate unnecessary debt before emerging from bankruptcy, says Whyte. If the company is to have a fighting chance of surviving in a troubled economy or a troubled industry, it must be able to redirect cash flow once used to pay principal and interest payments towards accumulating assets again.
From an investor′s point of view, buying a company′s distressed debt is, in essence, equivalent to buying the equity of the firm after it emerges from bankruptcy, says Carl Goldsmith. As a financier, when you enter a restructuring or reorganization situation, you must deal with varying management teams and boards of directors, and so you want to execute a plan quickly. Vital to making a restructuring or reorganization work, is transparency of accounting and trust in the financial statements. If the numbers can′t be validated, then no bankruptcy system will work, says Goldsmith.
Susanne Trimbath posed the question "How useful is the balance sheet in looking for signs of trouble within a company?" Some tell-tale signs can be assets growing at a faster rate than revenues or a company that frequently changes methods of accounting. Goldsmith says that he focuses on what the company′s debt is selling for in the market. For example, if a company′s bonds are selling for 50 cents on the dollar, and their stock price has not fallen by an equivalent amount, then there is a big disconnect, and a bond holder would view the company′s stock as worthless.
Trimbath then asked the question of whether there is an ideal capital structure out there. The consensus of the panel was a tepid no; every situation is different, they said, and it depends upon company and industry specifics. The only way to have an ideal capital structure is to find a way to have an unchanging cost of capital: impossible in the rapidly changing global economy.
