Many people gamble when it comes to buying bankrupt companies. It is best to stay away from stocks of bankrupt companies. What you want to do is buy securities as high up the chain of capital instruments that you can. In most chapter 11 cases, the new company comes out of bankruptcy with a new capital structure. The old stockholders stock is worthless. The bondholders are given new stock in the company. In some cases, they are given stock as well as bonds. I was involved in one such case in the year 2008.
I had bonds in a Canadian Lumber Company that was a victim of the Great Depression of the 21 Century. When the company came out of Chapter 11, they gave me both stock and bonds in the new company that equaled $1,000 per bond that I had in the old company. I invested about $650 per bond and I received some interest before the company filed Chapter 11.
This is what that investment looks like today. AINSWORTH LUMBER SER 144A 11% of 07/29/2015 value as of March 8, 2011, $612. 167 shares of AIMSWORTH LUMBER Co. LTD COMPANY sold at $3.326 value $555.37 The total of my $1,000 per bond investment on March 8, 2011 is $1,167.37 per bond. I get an 11% return on my new bond. But it is not all glory fishing in the bankruptcy pond. It is up to the courts to give you a good return on your investment as well as the market place. A bankruptcy settlement may happen as soon as a year from filling or as long as 10 years from filing. After settlement you may get nothing or less than what you put into the investment. The new securities may not have a secondary market for years. That is the risk. The worst bankruptcy that I ever got into was Wheeling Steel Corporation where I came out even over a three year period.
A company that is in bankruptcy and has a good chance of coming out ahead is Great Atlantic and Pacific Tea Company (A&P). GREAT ATLANTIC & PAC TEA INC 9.12500% 12/15/2011 SR NT sells for $350 per $1,000 bond. Who knows when it will come out of bankruptcy and in what structure? It is a gamble!
Listen to the legal opinion of a Bankruptcy Attorney discussing the A&P Case above. If you are going to invest in A&P, you have to figure out if you want to bet on the company going out of business or if you want them to recover. If you want them to go out of business, you better buy the highest bond debt that you can get. Mortgage bonds are paid first, then Notes, then debentures.
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