Is Spandex Corporation Worth It More Dead or Alive

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  • 8/17/2019 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., o!ert Falkner was trou!led makin" a decision on. Spandex had!een facin" ne"ative earnin" and poor liquidit# conditions which resulted in severe financial

    distress for the past three #ears. o!ert invested in the compan# a!out nine #ears a"o, atthe time the industr# outlook was "ood. Spandex has requested its creditors to !e "iven a

    chance to reor"ani$e and restructure. The compan# also vowed to put in their !est effort tosteer the compan# !ack on the road to profita!ilit#. %owever, if the firm was forced to

    liquidate, there&s a possi!ilit# the current assets could !e sold for '() of the !ook value,also the fixed assets mi"ht !e a!le to !rin" in a!out *+ million. evertheless -() of the

    "ross proceeds would !e paid towards administrative fees and other char"es. Confused andindecisive, Falkner turned to his CF for help, hopin" he could shed some li"ht after

    reviewin" the financial statements of Spandex.Financial distress is a situation where a compan# cannot meet its financial dut# to its

    creditors. There are various wa#s, which a firm can find itself in financiall# distressedposition. %avin" hi"h fixed costs, illiquid assets, and/or revenues that are sensitive to pooreconomic conditions are all wa#s a firm can find itself in financiall# distressed position.

    Spandex Corporation&s main pro!lems, which are resultin" their firm to !ecome financiall#distressed, are due to si"nificantl# lower profit mar"ins and declinin" demand due to

    competition and weak economic conditions. 0urin" the past three #ears SpandexCorporation has faced ne"ative earnin"s and poor liquidit# conditions.

     1!solute priorit# rule also known as 2liquidation preference.2 is a rule that specifies the orderof pa#ment in which creditors are paid !efore shareholders in the event of liquidation. In a

    case of !ankruptcies it is usuall# decided which participants will receive what portion ofpa#ment. 0e!ts to creditors will !e paid first and shareholders divide what remains. If

    Spandex Corporation was to !e liquated it should First3 4iquidate its assets to cash, Second3Pa# off de!t from cash reali$ed from sellin" of assets, Third3 Priorit# would !e to pa# senior

    creditors and shareholders receive whatever is left over. 1 plan for financial reor"ani$ation that a compan# prepares in cooperation with its creditors

    that will take effect once the compan# enters !ankruptc#. This plan must !e voted on !#shareholders !efore the compan# files its petition for !ankruptc#, and can result in shorter

    turnaround times. The idea !ehind a prepacka"ed !ankruptc# plan is to shorten and simplif#the !ankruptc# process in order to save the compan# mone# in le"al and accountin" fees,

    as well as the amount of time spent in !ankruptc# protection. The sooner the compan# canemer"e from !ankruptc#, the sooner it can implement its reor"ani$ation and return to

    "eneratin" revenues from its core operations.

    5orkout6 1n informal process !# which Falkner Investments Inc. and Spandex Corporation

    a"ree a different repa#ment plan, an exchan"e of common stock for the ori"inal de!t in thiscase. 5orkout is part of a Chapter 77 !ankruptc# process, which is also called reha!ilitation!ankruptc#.

    eschedule/restructure6 It means a rearran"ement of the terms of the repa#ment, such asthe interest rate and the loan period. It can also !e addin" an additional loan.

    8xtension6 It means Spandex Corporation extent the time to su!mit a reor"ani$ation planunder a Chapter 77 !ankruptc# process.Composition3 1n arran"ement !etween a !ankrupt and his creditors to finali$e the de!ts.

    The proposal would !e made, and creditors would vote on whether the# would accept it ornot. The proposal would include an# asset that is availa!le to the creditors and the assetsthat will !e distri!uted at an equal rate. Spandex Corporation would meet with Falkner

    Investments Inc. and other creditors to vote on Spandex&s proposal. The report will providedetail of the assets, the comparison of different alternatives, and the fee and expenses.

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    9Cram down:3 Cram down is the process under Chapter 77 reor"ani$ation. If one or more

    creditors still have o!;ections. Cram down allows the !ankruptc# courts to modif# the loanterms and forces various creditors to accept terms that the# do not like and vote a"ainst. The

    court decision is attempt to !rin" a fair and a"reea!le result to most of the creditors. 1utomatic sta#3 It is the suspension of certain le"al actions !# creditors a"ainst a de!tor or

    the de!tor&s propert#. If Spandex Corporation file a petition automaticall# sta#s, FalknerInvestments Inc. and other creditors cannot institute an# le"al action to collect de!ts over

    this period of time.

    4iquidation is a form of !ankruptc# in which the de!tor&s nonexempt propert# is sold forcash, the cash is distri!uted to the creditors, and an# unpaid de!ts are dischar"ed. 1 trustee

    will !e appointed to sell the assets and distri!ute the cash collections to the creditors. Thedistri!ution will follow a specified priorit# rankin" of claimants. Spandex Corporation&s senior

    notes will "enerall# !e repaid !efore other creditors can receive an# pa#ment.

    eor"ani$ation is a form of !ankruptc# in which the de!tor "ets to keep all the propert#. The

    de!tor would reor"ani$e the compan# and a re' million instead. Since net fixed assets, which were -(million, are now "oin" for + million, the total assets are calculated to equal *+B millioninstead of *7( million, which it was. Take out -() of that due to the administration fees

    which equals *7>,((,((( and what Spandex corp. will !e liquidated for is *D','((,(((.That is more than half of what it was worth. o!ert should vote in favor !ecause he has a!etter chance of !reakin" even or slowl# "ainin" a profit over time on his investment if the

    compan# was to restructure itself rather than not.