Post‐Chapter 11 Bankruptcy Performance: Avoiding Chapter 22

Edward Altman, Tushar Kant and Thongchai Rattanaruengyot

Journal of Applied Corporate Finance, 2009, vol. 21, issue 3, 53-64

Abstract: Despite the long experience in the U.S. with restructuring companies in bankruptcy, there remains a persistent tendency for companies to emerge from Chapter 11 with too much debt and too little profitability. In this article, the author uses a variant of his well‐known “Z‐Score” bankruptcy prediction model to assess the future viability of companies when emerging from bankruptcy, including the likelihood that they will file again—a surprisingly common phenomenon that is now referred to as “Chapter 22.” The author reports that those companies that filed second bankruptcy petitions were both significantly less profitable and more highly leveraged than those that emerged and continued as going concerns. Indeed, the average financial profile and bond rating equivalent for the “Chapter 22” companies on emerging from their first bankruptcies were not much better than those of companies in default. The authors findings also suggest that a credible corporate distress prediction model could be used as an independent, unbiased method for assessing the future viability of proposed reorganization plans. Another potential application of the model is by the creditors of the “old” company when assessing the investment value of the new package of securities, including new equity, offered in the plan.

Date: 2009
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