Alternative Exit and Restructuring Strategies

Bankruptcy and liquidation represent alternative restructuring or exit strategies for failing firms. As such, this chapter focuses on the characteristics of such firms and the bankruptcy process. This chapter discusses in detail the major motivations for bankruptcy, the conditions under which a firm is considered bankrupt, and how the 2020 COVID-19 pandemic impacted failing firms. Bankruptcy enables a failing firm to reorganize, while protected from its creditors, or to cease operation by selling its assets to satisfy all or a portion of the firm’s outstanding debt. How reorganization and liquidation take place both inside and outside the protection of the bankruptcy court are examined in detail, as are Section 363 sales, prepackaged and prearranged bankruptcies, and cross-border bankruptcy. Common tactics, such as debt-for-equity swaps, compositions, and extensions, used by debtor firms to negotiate with creditors and the circumstances in which they are used, are analyzed. This chapter also addresses the advantages and disadvantages of strategic options for failing firms ranging from merging with another firm to reaching an out-of-court voluntary settlement to voluntary and involuntary liquidations. Moreover, the chapter describes the increasing role of hedge funds in the bankruptcy process. The current state of bankruptcy prediction models and their limitations as well as the results of recent empirical studies of the performance of firms experiencing financial distress also are examined.