Alphatec Electronics CaseProf. Florencio Lopez-de-SilanesMsc Finance Group 12 Sajjad ALI Yang YANG Zilu SHAN Yang ZHAO Zhouyuan ZHAN
Bad Management, Bad Business or Bad Capital Structure?
Bad ManagementBusinesses that could have provided positive cash flow for investment were slow in getting off the ground.Alphatec Group was an informal entity without any legal basis.
Bad Management Led to the Fall of ATEC
The head of the directors countersigned all the major ATEC checks written by Charn.
The board of directors mainly consisted of bankers and they didnt know the electronics industry.
Business EnvironmentThe allowance of the Baht to float in international money markets, resulted sharp plunging in value of Baht. Which in turn led to Alphatecs financial distress due to its debt denominated in US Dollars.
In 1995,a general slowdown in the global semiconductor industry led ATECs profits fell by 35%
Current Debt and Financial Reporting Situation When it filed for bankruptcy protection in Thailand, ATEC had over 1,200 different secured and unsecured creditors, located in dozens of countries. Charn withdrew money from ATEC without proper authorization.
Internal management accounts
financial accounts for public
Restructure or Not?
Restructuring VS LiquidationRestructuring Senior unsecured creditors get 12-13% on the dollar Senior secured creditors get same 20-25% on the dollar Converting 95% of their outstanding debt into equity Optimized future performance and value of ATEC Liquidation Senior unsecured creditors Get 0% on the dollar Senior secured creditors get same 20-25% on the dollar If restructuring dont work, liquidate the company Will affect ATECs long term value (Alphatec II vs. NSEB)
5 Things to Consider:ATECs financial projections seem to be optimistic
In 1997, the Baht fell by 25%, resulted ATECs financial distress because of its large US denominated debt
Positive net profit but negative working capital , Most of ATECs cash comes from borrowing (2,057.5 million baht in 1996).This financial problem is solved through the pre financing of A/R
A failure in restructuring will destroy shareholders value
Uncertainty about the firms current true value due to the financial irregularities
Vote for Out-of-court Restructuring?We vote:
Profit more than 12-25% on a dollar through converting outstanding debt into equity Shorter period compared to 15 years if liquidating the firm ATECs financial projections have positive FCF history during 19982002
Modified Plan Feasible or Not?
Is the modified bankruptcy reorganization plan feasible for a bank? $10 million in equity AHC $25 million in senior secured debts and $10 million in junior secured debts $55 million non-interest bearing performance linked obligation under certain conditions
$20 million in senior secured debt $8 million in junior secured debt Creditors might spend as long as 15 years in court to claim their rights
Conditions to Execute the Performance Linked Obligations10 year maturity obligation Possibility of converting into cash or new debt of ASP at maturity Conversion option tied to ASP performance in the final 3 years of obligation life
If the average net profit of the period is BELOW$40 million, there would be no conversionIf the average net profit of the period is ABOVE $130 million, there would be 100% conversion
Forecasted Income of ASP for 2006 - 2008Income Projections Management Credit Agricole Expected Income 1999 2 0 2000 12 4 2001 30 13 2002 57 14 2003 72 13 2004 102 18 2005 138 15 2006 116 15 2007 134 18 Averag e of 062008 08 151 20 134 18
Under the management forecast, there will be the possibility of converting the $55 million at maturity, however, it will not be 100% Under Credit Agricole projections, at maturity there will not be any conversion since the average for the last three years is below $40 million In order to provide a better solution, we took into account the probability of both scenarios happening, there 50% of chance each Our results are shown above, which will be $76 million for the last 3 years, meaning that there will be conversion of the debt, but not at 100%
Vote or Notto the rehabilitation planIf the creditors allowed the firm to liquidate, at the most they would get $28 million, but that might take up to 15 years to settle Rehabilitation plan would offer minimum of $45 million in debt and equity, plus the possibility of converting the performance related obligations at maturity
Reasons to Invest! Returns and Risks?
Reasons to InvestThe lenders has to accept an up to 90% loss of their loans in exchange for an equity stake in the reconstructing entity. As a result, the investment is a bargain for AIG and investor AB. Since ATEC has been a hi-tech pioneer in Thailand, AIG and investor AB are confident of its their future potential.
They might have previous considered about entering the Thai market.
After the investment, they own 80% of AHC, therefore gain the control and can influence the operating decision.
If the investment does not pay off. They can decide whether to make additional investment.
AIG and investor AB would own 80% of AHC, which holds 99.9% of the equity of Alphatec Semiconductor Packaging. They believe the reconstruction will increase companys value AIG and investor AB also have the opportunity to enter Thailand market.
RisksFirstly, the potential political problem of a state-owned bank using taxpayer money to bail out an allegedly fraudulent bankrupt operations.
Secondly, unlike private banks, KTB may not have provided adequate reserves against losses.
Lastly, the lack of judicial expertise in this and other bankruptcy proceedings. There is still possibility that overseas claims are not protected by the law.
The future profitability of AHC is uncertain.
Problems in the old law &Changes in the new law
Problems of Thailands old Bankruptcy lawNo options for those who seek restructuring.
Only liquidation option for distressed companies Lengthy legal process. Creditors could face as long as 15 years in courts but still dim prospects remains for recovery.It failed to provide provisions for recovering laundered money from former management or any party to such actions thereafter. The law did not recognize different classes of creditors
Recommendations of The New LawThe new law has restructuring conditions before bankruptcy while shareholders still have no say in the process. Provisions should be made to ensure shareholders rights during the restructuring process.
The new law has no provisions for misappropriated funds. Amendments should be made to boost transparency and potential investors confidence.
The new law provides provisions for appointing an Official Planner and a Plan Executor which might lead to agency problems. Checks need to be added to deal with the agency problems.
The new law failed to have any provisions to seek recovery from former management of a company or any party to such actions. A provision should be made to seek recovery so that affected parties can follow through with legal proceedings, if they are not deterred by the long time taken in the courts.
Different Outcome in US and UK
UK Insolvency ProcessThe directors and shareholders can instigate a liquidation without court involvement by a share holder resolution and appointment of a licensed Insolvency Practitioners as liquidator.
the liquidation will not be effective legally without the convening of a meeting of creditors who have the opportunity to appoint a liquidator of their own choiceAlternatively, a creditor can petition the court for a winding-up order which, if granted, will place the company into what is called compulsory liquidation or winding up by the court. The liquidator realizes the assets of the company and distributes funds realized to creditors according to their priorities, after the deduction of costs In the case of Sole Trader Insolvency, the insolvency options include Individual Voluntary Arrangements and Bankruptcy.
US Insolvency ProcessWhen a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.
In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.
In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court
Chapter 11 affords the debtor in possession a number of mechanisms to restructure its business.
A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings. The court may also permit the debtor in possession to reject and cancel contracts.Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
Thank you for your time.