Morgan Stanley Roundtable on Managing Financial Trouble

Edward Altman

Journal of Applied Corporate Finance, 2007, vol. 19, issue 4, 16-43

Abstract: Against the current backdrop of troubled credit markets and the possibility of growing defaults, a distinguished group of bankruptcy academics and practitioners explore a number of questions raised by the emergence of increasingly active distressed investors: Are these relatively new market forces and mechanisms at least partly responsible for today's historically low default rates? Can they be expected to continue keeping default rates low, even if the economy goes into recession? And perhaps most important, by preventing or delaying defaults, will these new reorganization methods end up increasing recoveries and preserving value? The second half of the discussion focuses on some of the potential problems, or obstacles to the working of these market forces. For example, how will distressed situations play out in cases involving dispersed creditors, such as the holders of CDOs and CLOs? Will there be negative side effects from other financial innovations such as credit derivatives? While acknowledging the challenges of resolving some relatively new kinds of inter‐creditor conflicts, most of the panelists expressed confidence that today's distressed investors, working within the context of a streamlined Chapter 11 process, can be expected to play a major role in preserving values for creditors. At the same time, such investors will help perform the critical economic function of ensuring, in Douglas Baird's words, “that those companies that should survive do survive” and that corporate assets, whether liquidated piecemeal or kept within the firm, end up in their highest‐valued uses with their most efficient users.

Date: 2007
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