Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 4Restructuring Out‐of‐Court and the Cost of Financial Distress
If restructuring in bankruptcy is very costly, firms should have strong incentives to restructure out of court. What options does a firm have for restructuring out of court, and when are they or are they not feasible? Why might some firms choose to restructure in court?
When a firm is unable to complete an out‐of‐court reorganization, it may have no other choice but to enter a more costly, court‐supervised bankruptcy proceeding. Thus, the structure of Chapter 11 that we have reviewed in the prior chapter of this text serves as the backdrop in negotiating a potential out‐of‐court restructuring. Academic scholars have long argued that when the costs of bankruptcy are high, claimants of a distressed firm should be able to negotiate out of court without affecting the value of the underlying firm. Many others, however, point out that there can be significant impediments to completing an out‐of‐court restructuring, such as creditor holdouts or conflicts between creditor groups.
In this chapter, we first review the rigorous academic studies investigating the costs of financial distress, and in particular the costs of bankruptcy. We then introduce private workouts and out‐of‐court restructurings, comparing the structure and benefits of these options to an in‐court restructuring. We wrap up the chapter by discussing the major challenges facing out‐of‐court restructuring and summarize relevant academic studies on ...