Hay all! Hope everyone is keeping safe and well in these uncertain times!
Iv just read about US banks or US Loan companies taking over US oil companies that are struggling on the verge of bankruptcy. So say you have shares in one of those companies, what would happen to your shares?
Normally the equity holders are wiped out so your shares would be worthless. Equity sits above debt in the risk rankings and so if a company defaults on its debt then equity holders will receive a haircut before debt holders do.
This is what distressed (debt) investing is about. They come in when things are trading at cheap levels - usually looking at debt, as it’s backed by something and becayse ordinary shares are at the botton of the food chain.
And the outcomes depend on what sort of end-game packages they agree on - the company, financial and legal advisers, creditors, courts, etc should agree on. Sometimes, some stubborn equity holders remain with smaller shares. Most of the time they should get wiped out.
Think of it like a long game of chess.
If you’re interested, read up on Chapter 11 and English Law insolvency procedures. Different countries have different legislations.
It’s a massive industry. And you’ll see more distressed debt investing now that a bunch of companies are running out of cash.
Every case is different and it’s a pain if you’re an original equity holder or debt investor - and can be fun if you bought some of that debt cheaply (but average Joes usually can’t participate because of the minimum denomination of bonds/loans, illiquidity of those securities, and lack of access to the debt market).
I have a thread on this:
Elliott is also a big player in activist and distressed debt investing:
Also worth studying the airline industry’s history of going bust: