Business Commons^™

An Innovative Framework: Evaluating The New German Business Stabilization And Restructuring Law (Starug), Andreas Rauch

Northwestern Journal of International Law & Business

This comment examines the restructuring framework, restrukturierungsgesetz (“StaRUG”), and argues that this new law represents an effective—albeit radical—departure from Germany’s previous, conservative insolvency regime. Passed in response to a 2019 EU Directive aimed at modernizing restructuring law Union-wide, and integrated into the German legal system against the backdrop of the COVID-19 pandemic, StaRUG and its ancillary reforms in other areas of German law create a restructuring proceeding that places a premium on a debtor’s continued business operations. Thus, in a striking shift from the traditional German approach to business distress, which strongly emphasized creditor rights, the new StaRUG focuses on …

Pandemic Hope For Chapter 11 Financing, David A. Skeel Jr.

All Faculty Scholarship

One of the biggest surprises of the recent pandemic from a bankruptcy perspective has been the ready availability of financing. A variety of factors—such as an estimated $2.5 trillion in available funding at the outset of the crisis and the buoyant stock market—may have contributed. In this Essay, I focus on a less widely appreciated factor, a striking shift in the capital structure of many corporate debtors. Rather than borrowing from one group of lenders, debtors now often borrow from multiple groups of diverse lenders. Although the new capital structure complexity has downsides, it also could counteract a longstanding problem …

Enhancing Rescue In Chapter 11: Lessons From Reform Efforts In The United Kingdom, Robert J. Landry Iii

Research, Publications & Creative Work

This is a dynamic time for insolvency law. Many jurisdictions have or are considering reforms to their insolvency regimes. The U.K. has proposed a new standalone restructuring mechanism that incorporates many attributes of Chapter 11, including a cross-class cram down and the absolute priority rule. A distinctive feature of the U.K proposal is the infusion of judicial discretion permitting courts to deviate from the absolute priority rule. This discretion is not permitted in the U.S. This judicial discretion addresses a key problem with the application of the absolute priority rule in the U.S. – it serves as an impediment to …

The Lehman Brothers Bankruptcy H: The Global Contagion, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

When Lehman Brothers filed for bankruptcy on September 15, 2008, it was the largest such filing in U.S. history and a huge shock to the world’s financial markets, which were already stressed from the deflated housing bubble and questions about subprime mortgages. Lehman was the fourth-largest U.S. investment bank with assets of $639 billion and its operations spread across the globe. Lehman’s clients and counterparties began to disclose millions of dollars of potential losses as they accounted for their exposures. But the impact of Lehman’s demise was felt well beyond its counterparties. Concern regarding its real estate assets, its large …

The Lehman Brothers Bankruptcy B: Risk Limits And Stress Tests, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Investment banks are in the business of taking calculated risks. Risk management infrastructure facilitates the safe pursuit of profits and the balancing of associated risks. By 2006, Lehman Brothers was thought to have a very respectable risk management system, and even its regulator, the Securities and Exchange Commission, viewed its risk framework as being fully compliant with regulatory requirements. In its public disclosures, Lehman characterized its risk controls as “meaningful constraints on its risk taking” and evidence of its continued financial stability. Beginning in late 2006, however, Lehman began dismantling its carefully crafted risk management framework as it pursued a …

Two Essays On Liquidity Endogeneity And Effects Of Political Connections, Chengcheng Li

Theses and Dissertations

The two essays in my dissertation explore separately the issues related to stock market liquidity and corporate financial distress. My first essay examines the effects of widespread liquidity demand on the stock liquidity. My second essay explores the effect of political connections on the corporate financial distress.

In the first essay, I explore several questions related to the effect of liquidity demand on the individual stock liquidity level. I find that domestic actively managed equity funds in general hold less liquidity than their corresponding benchmarks. This leads them to rely more on the small fraction of liquid assets for immediacy …

Foreword: Bankruptcy’S New And Old Frontiers, William W. Bratton, David A. Skeel Jr.

All Faculty Scholarship

This Symposium marks the fortieth anniversary of the enactment of the 1978 Bankruptcy Code (the “1978 Code” or the “Code”) with an extended look at seismic changes that currently are reshaping Chapter 11 reorganization. Today’s typical Chapter 11 case looks radically different than did the typical case in the Code’s early years. In those days, Chapter 11 afforded debtors a cozy haven. Most everything that mattered occurred within the context of the formal proceeding, where the debtor enjoyed agenda control, a leisurely timetable, and judicial solicitude. The safe haven steadily disappeared over time, displaced by a range of countervailing forces …

Correlation Concerns, Steven D. Dolvin

All Chapters

Modern Portfolio Theory (MPT) is based on the notion that diversification creates better (a.k.a., more efficient) portfolios. The benefit of the diversification stems from less than perfect correlations between asset classes. However, during times of extreme stress, and even in recent years with market integration, correlation values have increased. This calls into question whether diversification will bring the full benefit that it is expected to provide. See article here, Bloomberg.

Rediscovering Corporate Governance In Bankruptcy, David A. Skeel Jr.

All Faculty Scholarship

In this Essay on Lynn LoPucki and Bill Whitford’s corporate reorganization project, written for a symposium honoring Bill Whitford, I begin by very briefly describing its historical antecedents. The project draws on the insights and perspectives of two closely intertwined traditions: the legal realism of 1930s, whose exemplars included William Douglas and other participants in the SEC study; and the law in action movement at the University of Wisconsin. In Section II, I briefly survey the key contributions of the corporate governance project, which punctured the then-conventional wisdom about the treatment of shareholders in bankruptcy, managers’ principal allegiance, and many …

From Chrysler And General Motors To Detroit, David A. Skeel Jr.

All Faculty Scholarship

In the past five years, three of the most remarkable bankruptcy cases in American history have come out of Detroit: the bankruptcies of Chrysler and General Motors in 2009, and of Detroit itself in 2012. The principal objective of this Article is simply to show that the Grand Bargain at the heart of the Detroit bankruptcy is the direct offspring of the bankruptcy sale transactions that were used to restructure Chrysler and GM. The proponents of Detroit’s “Grand Bargain” never would have dreamed up the transaction were it not for the federal government-engineered carmaker bankruptcies. The Article’s second objective, based …

Diversification Revisited, Steven D. Dolvin

All Chapters

Asset allocation is widely considered to carry the most weight in determining a portfolio's overall return, but we often avoid/ignore many categories that could be helpful. See article here for a discussion of why diversification matters, Fidelity.

On the contrary, though, some analysts believe too much diversification is not a good thing. See article here (WSJ) to help answer the question, "How Much Diversification Is Too Much?"

Going Global, Steven D. Dolvin

All Chapters

For diversification reasons, most investors should consider investing internationally. However, many investors have limited knowledge about how to do so or about how to determine how much exposure to have internationally. Click here for a recent WSJ article that provides some guidance on these issues.

Abi Commission Testimony November 7, 2013, George W. Kuney

Transactions: The Tennessee Journal of Business Law

There are two areas that I believe should be the focus of Chapter 11 reform: reducing reorganization costs in small to middle-market cases and instituting a uniform structure and process for § 363 sales of substantially all the assets of a debtor. Essentially, I think that the plan process in all cases needs to be streamlined and sped up to decrease transactions costs, and the 363 sale process needs to be slowed down to promote more robust disclosure and exposure of the assets in question to the market.

Politics In The American Airlines-U.S. Airways Merger And Antitrust Settlement, Michelle Chan

Fordham Journal of Corporate & Financial Law

American Airlines was one of the airline industry’s darlings. A legacy airline, it was a household name, a massive entity, employed thousands, and commanded a fearsome presence among other industry players like unions and airport terminals. However, with ballooning costs and the red ocean airline industry’s evolution, American Airlines’ parent company, AMR, was forced into bankruptcy in November 2011. To emerge from Chapter 11, American Airlines and U.S. Airways announced plans to merge and come out a stronger, larger airline in February 2013. The Department of Justice Antitrust Division shortly thereafter filed a lawsuit opposing the merger, alleging it would …

Increased Leverage = Less Risk?, Steven D. Dolvin

All Chapters

All else equal, the use of leverage increases investment risk. But, can it ever have the opposite effect? Investors using the so-called risk parity trade believe the answer is yes. Under this approach, a portfolio is built using equity and debt, but the debt is purchased using leverage. The strategy is based on two key points: (1) equity is more volatile than debt and (2) debt returns are negatively correlated to equity returns. Thus, with leverage, the debt returns are in effect more volatile. When combined, the negative correlation creates a less risky portfolio as the equity and debt returns …

"Alternative" Alternative Investments, Steven D. Dolvin

All Chapters

Typical Alternative Investments include such categories as commodities and real estate. However, some investors have branched out into more esoteric assets such as cars and collectibles. As such, there is a growing category of managers offering such funds. See the article here, Wall Street Journal.

High Yield Debt, Steven D. Dolvin

All Chapters

High Yield Debt is a nice way of saying "junk" debt, i.e., debt that is considered speculative grade. As you would expect, the yield on such debt, due to higher default risk, is higher than standard investment grade debt. However, with historically low interest rates, even the yields on "high yield" debt don't look so high any more. See article here, International Financing Review.

Is Diversification Dead?, Steven D. Dolvin

All Chapters

Diversification (primarily based on asset correlation) is a key component of Modern Portfolio Theory (MPT). However, the recent financial crisis illustrated an increase in correlation across asset categories. Thus, many debate whether diversification still helps. Even with increasing correlations, diversification still provides benefit (possibly just not as much). However, the more relevant issue is that increasing correlation across the typical asset categories suggests that diversification is now more critical across "non-typical" categories -- such as commodities, hedge funds, and private equity funds. .

The Intra-Industry Effects Of Chapter 11 Filings: Evidence From Analysts’ Earnings Forecast Revisions, Gary L. Caton, Jeffrey Donaldson, Jeremy Goh

Research Collection Lee Kong Chian School Of Business

Shareholders suffer huge losses when firms they own file Chapter 11. Interestingly, even shareholders of rival companies experience statistically significant losses. We examine how the bad news associated with a bankruptcy filing is transferred to the filing firm’s rivals. Using revisions in analysts’ earnings forecasts as a proxy for changes in expected future cash flows, we find that after a bankruptcy filing the market revises downward its cash flow expectations for rivals. Regression analysis confirms a positive relation between changes in expected cash flow and stock market reactions. These findings are consistent with our hypothesis that bad news associated with …

Assessing The Chrysler Bankruptcy, Mark J. Roe, David A. Skeel Jr.

All Faculty Scholarship

Chrysler entered and exited bankruptcy in 42 days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo sale of its main assets to a new government-funded entity. The unevenness of the compensation to prior creditors raised considerable concerns in capital markets, which we evaluate here. We conclude that the Chrysler bankruptcy cannot be understood as complying with good bankruptcy practice, that it resurrected discredited practices long thought interred …

The Past, Present And Future Of Debtor-In-Possession Financing, David A. Skeel Jr.

All Faculty Scholarship

Chapter 11's distinctive post-petition financing rules trace their ancestry back to the origins of large scale corporate reorganization in America in the nineteenth century. In this sense, post-petition financing has always been with us. But in the past decade, the role of the financers has changed. After a century in the shadows, post-petition lenders have stepped onto center stage. The DIP loan agreement has become the single most important governance lever in many large Chapter 11 cases. Why have these formerly bashful financers suddenly started hogging the spotlight? I argue in this article that the generous terms offered to DIP …