Corporate Restructuring Valuation And Insolvency Pdf
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- How to Prepare CS Professional Corporate Restructuring Valuation and Insolvency
- CORPORATE-RESTRUCTURING VALUATION AND INSOLVENCY, 1/e
How to Prepare CS Professional Corporate Restructuring Valuation and Insolvency
Corporate restructuring: empirical evidence on the approval of the reorganization plan. When a corporation presents a reorganization plan, it expects its creditors to approve the plan. This paper provides empirical evidence regarding the likelihood of approval based on reorganization plans for creditors in Brazil that require approval by employees; and by secure and unsecure debtholders. This paper involves a descriptive analysis of the main characteristics of reorganization plans by type of vote.
Using a sample of reorganization plans proposed by corporations from to , we find that the labor class of creditors is likely to approve the reorganization plan even when the plan is rejected; plans with more heterogeneous payment for classes are less likely to be accepted; plans are less likely to be accepted when there are more unsecure creditors; and plans with divestment proposals are more likely to be accepted.
Finally, as expected given the seniority position of secured debt, plans are less likely to be accepted when the portion of secured debt is higher, and the reverse is true for unsecured debt. When a company faces financial distress it may choose to devise a reorganization plan. Such a plan must be presented to its creditors, who ultimately vote to approve the reorganization plan or to subject the company to bankruptcy proceedings.
This paper examines this decision making process. Moreover, asset disposal facilitates the approval of reorganization plans. Empirical evidence demonstrates the importance of bankruptcy law to the credit market and enforcement by courts. The interaction between debtors and representative creditors in situations of financial distress has received considerable attention.
Kordana and Posner study bargaining with multiple creditors, incorporating the operation of the voting rules for companies filing Chapter Therefore, we do not address causality in our study; this paper provides a descriptive analysis. To our knowledge, there is a lack of empirical explanations of how creditors decide to vote on reorganization plans.
Moreover, this is the first study to examine the likelihood of acceptance of reorganization plans by considering the decision process of each class of claimholders and the characteristics of the plans in Brazil.
In , Law 11, took effect in Brazil with the goal of providing creditors with better conditions for reorganizing or liquidating companies facing financial distress. As Kordana and Posner note, little attention has been devoted to the examination of the correspondence between voting rules during reorganizations. Hence, our descriptive results provide evidence on the characteristics surrounding creditor's decision making processes.
The literature on reorganization and bankruptcy provides extensive theoretical and empirical analysis of debt restructuring. Moreover, they try to understand why firms borrow from multiple creditors, although it could make the future resolution of distress more complex. The ex post approach aims to show the best alternatives for sorting out claims in situations where financial distress has already occurred. Similarly, the choice of debt structure influences what occurs in bankruptcy according to Aghion, Hart, and Moore These researchers elucidate the conflict between debtors and representative creditors.
Unfortunately, in this paper we cannot control for ex ante variables because the majority of our data do not provide financial statements that allow this. We present empirical evidence about the characteristics of voting on reorganization plans by separately conducting the analyses according to the outcome of the vote on the plan.
Hence, this paper investigates a very important issue from not only a theoretical but also a managerial perspective. We aim to understand how different classes of creditors vote in approving or rejecting recovery plans by controlling for the conditions specified in the reorganization plans. We analyze data collected from to We use as the starting year because the new Brazilian bankruptcy law entered into force in this year.
Under the new Brazilian bankruptcy law, creditors play a more important role in company restructuring because of the new voting procedure for reorganization plans. After choosing to restructure its debt in court, a firm must create a reorganization plan that presents a solution for its financial distress.
Unlike Chapter 11 in the US bankruptcy code, Brazilian bankruptcy law does not require a claim administrator to organize and provide information on all claims and claimholders. In the US, indenture trustees act on behalf of creditors: therefore, claimholders do not meet to vote on reorganization plans. Although creditors vote by following a different procedure, Ponticelli shows that similarities exist between Brazilian bankruptcy law and the US bankruptcy code and Anapolsky and Woods present more details about the similarities and differences in reorganization rules between the two countries.
When a creditor does not approve the reorganization plan presented by a specific firm, the different classes of creditors decide whether to allow recover or to subject the firm to bankruptcy together in an Assembly, where the labor, secured and unsecured creditors vote on the plan. All three classes of creditors must vote to approve the plan. With regard to secured and unsecured creditors, the plan must be accepted by a majority of creditors at the meeting number criteria and at least half of the total debt value for each class must be represented during the vote value criteria.
By contrast, for labor creditors, only a majority vote is required number criteria. These two criteria allow firms to avoid opportunistic behavior from creditors, where some creditors might refuse to approve the plan if they do not receive special treatment. If the plan is rejected, the firm enters bankruptcy.
Based on data on restructuring plans from to we find that the labor class of creditors approves the reorganization plan even when the plan is ultimately rejected. Moreover, we find that approved plans have a smaller portion of debt discounted and higher grace period on average than rejected and modified plans. To evaluate the likelihood of acceptance of reorganization plans, we run probit regressions.
We find that asset disposal increases the likelihood of restructuring plan approval. One possible interpretation of this finding is that collateral is an important determinant of recovery plan acceptance. Creditors seem to generally prefer that firms liquidate a portion of their assets since it facilitates their ability to receive cash.
We also find that secured debt creditors have lower incentives than the other classes of creditors to accept reorganization plans; moreover, since they are the last class of creditors to receive payment after liquidation, unsecured creditors are more likely to accept reorganization plans.
We also find that high debt values from banks in the junior class are negatively related to plan acceptance and that payment disparities among all classes of creditors seem to reduce the likelihood of acceptance.
This paper is structured as follows: The second section discusses the related literature. The third section describes our data. The fourth section describes the empirical strategy of analysis. The fifth section reports empirical results and a related discussion. The final section concludes the paper. The implementation of a bankruptcy process by law raises some concerns regarding its effects on security prices, default losses, priority rules and financial reorganization.
This research focuses on bankruptcy resolution. According to Djankov, McLiesh, and Shleifer there is a group of papers that connect legal protection for creditors and judicial efficiency.
For instance, Claessens and Klapper argue that greater judicial efficiency is strongly associated with greater use of bankruptcy, although the combination of stronger creditor rights and greater judicial efficiency leads to less use of bankruptcy. We would like to highlight the studies that seem to explain why the resolution of financial distress varies across countries.
Gennaioli and Rossi show that strong creditor protection increases the efficiency of the resolution of financial distress because it provides judicial incentives. Based on a sample of 49 countries, La Porta, Lopez-De-Silanes, Shleifer, and Vishny find that countries with poor investor protection legal rules and quality of law enforcement have smaller and narrower capital markets. To construct a measure of the efficiency of debt enforcement, Djankov, Hart, McLiesh, and Shleifer compare debt enforcement for the same kind of business in 88 different countries.
They find that institutions that regulate insolvency usually perform poorly owing to their inefficient bankruptcy procedures. For example, the Italian bankruptcy code includes two main procedures liquidation and reorganization for addressing an insolvent company. In the case of bankruptcy liquidation, the bankruptcy court appoints a trustee who shuts down the firm and sells its assets or even sells the whole business.
Since we focus on the reorganization process for distressed firms, it is important to examine guidance provided regarding the power of law. In this regard, Platt and Platt examine factors that seem to predict financial distress in the US, Europe and Asia: they find that differences in accounting rules, legal practices, environmental laws and business practices between regions may limit the degree of convergence in the area of financial distress.
Indeed, bankruptcy law varies considerably around the world. Several studies have examined the main characteristics of restructuring processes around the world. According to Franks, Nyborg, and Torous and Hotchkiss et al.
In studying the primary effects of the new Brazilian bankruptcy law, Araujo and Funchal find that the new law has had a rapid and strong impact on the number of bankruptcies in Brazil.
According to these authors, expansion of the credit market is observable. Moreover, Kadiyala investigates the impact of bankruptcy law reform on capital markets in Brazil and, based on an empirical analysis of four different stock indexes Bovespa, IBX, IGCX and ITAG , shows that aggregate stock market indexes reacted positively by the time that new rules were signed into law.
These results are consistent with those of La Porta et al. Following Quian and Straham's argument that the quality of the legal environment shapes the characteristics and terms of bank loans around the world, Araujo, Ferreira, and Funchal evaluate the empirical consequences of the bankruptcy reform on credit markets by using a quasi-experimental approach to compare Brazilian firms with non-Brazilian firms companies from Argentina, Chile and Mexico.
The result shows that increased protection is responsible for both an increase in the amount of long-term debt and a reduction in the cost of capital. Exploiting the quality of court enforcement across Brazilian judicial districts, Ponticelli shows that efficient court enforcement helps sustain higher capital investment and productivity for companies.
Thus, firms that face better court enforcement benefit in terms of access to external financing, investment and productivity.
Moreover, De Assis present an interesting study focused on analyzing judicial recovery proceedings immediately following the implementation of the new bankruptcy law. This paper provides some analysis of restructuring plans and shows that the average time to complete all stages of the proceedings exceeds a reasonable amount of time. Our paper must corroborate previous work since it intends to present and analyze information provided in reorganization plans.
Under the new Brazilian bankruptcy law, court-based restructuring permits different means of restructuring, such as a potential change in corporate control, the stipulation of special terms and conditions for payments of obligations, and the right of veto for creditors regarding restructuring plans. The results regarding the new Brazilian bankruptcy law show that many companies have chosen to adopt a restructuring plan in order to address their financial problems.
Moreover, the total number of restructuring cases has increased in each year after the new law entered into force. Until , bankruptcy in Brazil was ruled by Law Law did not offer conditions for the recovery of economically viable companies that faced financial distress. The old reorganization procedure known as concordata only postponed corporate debt.
Moreover, as the main shortcomings of the previous system, the liquidation process was characterized by extensive bureaucracy, optimal recovery could generally not be achieved in situations of distress, and firms faced difficulties in obtaining new debt to restructure their business.
Moreover, the insolvency process did not effectively protect credit rights after liquidation. According to Funchal , creditors play a more significant role in the restructuring procedure under the new Brazilian bankruptcy law because they are involved in the negotiation and voting on the reorganization plan. As noted earlier, all three classes of creditors must vote to approve the final plan. However, Brown finds that heterogeneous groups of creditors are more concerned with receiving guarantees, whereas homogenous creditors are primarily concerned with participating in the restructuring process.
It is important to highlight that tax creditors and creditors holding loans supported by fiduciary alienation of assets are not subject to recovery: therefore, they do not vote on reorganization plans. Secured creditors vote as a class and represent an amount up to the value of their collateral. Moreover, when creditors demand more than their collateral value, they can vote as both secured and unsecured creditors, and they then represent exactly the same amount they own for each category.
Debtors can indicate the period that they believe to be reasonable by which to pay their secured and unsecured creditors. However, according to article 54 of Law The firm must present the reorganization plan in court within sixty days after deciding to undergo a restructuring process;. The judge communicates that the recovery plan has been received and sets a deadline for creditors to present any objection;.
As you know, now a days CS Programme is also very much popular among the students of commerce. Login Invalid login details. Register For New Account. Forgot Password Invalid Email Id. Chand Publishing Trim size : 6. List Price : The Unique features of this book are.
Sangeet Kedia , 43, B. Along with this, he is also a Consultant for Corporate Laws and Secretarial Matters to number of well reputed companies. He has a teaching and industry experience of more than 15 years.? He has addressed various career counseling and academic programmes. He was also one of the panelists for judging various competitions such as Company Law Quiz, Elocution, Moot Court,, etc. He is also the author of many books for the professional courses. Nishiparna B.
CORPORATE RESTRUCTURING, VALUATION AND INSOLVENCY. Corporate Restructuring is a non-recurring exercise for an organisation but it has a lasting.
CORPORATE-RESTRUCTURING VALUATION AND INSOLVENCY, 1/e
Corporate Restructuring may be a one-time exercise for an organisation but it has a lasting impact on the business and other concerned agencies due to its numerous considerations and immense advantages viz. Corporate restructuring is an expression, by which a company can consolidate its business operations and strengthen its position for achieving its short-term and long- term corporate objectives - synergetic, dynamic and continuing as a competitive and successful entity. Types of Corporate Restructuring: The most commonly applied tools of corporate restructuring are amalgamation, merger, demerger, acquisition, joint venture, disinvestments etc. Mergers and amalgamations, we mean a merger of two or more distinct entities.
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