A question about stocks and bankruptcy:

[ret5hd]

When a corporation goes into bankruptcy, does the companys existing stocks always end up worthless and new stock re-issued when the company reorganizes? Like GM did.

Or does it sometimes happen that the existing stocks are "kept" (honored?) after the company reorganizes?
If so, how is that decided? Does an outsider have any indication of which way a bankruptcy will go?

thanks in advance.

[Ruby the Liberal]

1. There is a heirarchy for repayment

Secured debt first, then unsecured, preferred equity then standard equity last.

Stock warrants can be offered and often are in order to reward those who take a gamble and are willing to invest during the reorganization. Typically those are to capital funds people like Berkshire Hathaway, but can be used to soften the blow for existing shareholders at the time of the filing.

Thats really over-simplified. Do you have a specific situation in mind?

[ret5hd]

2. i guess, simply, i am asking if...

a new set of stocks is always issued after bankruptcy (assuming the company doesn't liquidate) and the old stock "thrown away".

[Ruby the Liberal]

3. Stock isn't thrown away

unless it is worthless and the company no longer viable. Stock is issued at any time a company wants to raise money. Whether or not it is a good investment is another story. I could start a business tomorrow and sell stock to fund it - but that is meaningless if I can't find anyone to invest in my idea by buying..

[rdking647]

5. actually they old stock can be cancelled in a BK

and usually is

[rdking647]

4. heres what happens

the creditors of the company get paid off first. the current stockholders are last in line. usually there is nothing left to pay off the current shareholders and they get nothing but there are rare instances where they do get a few dollars.

usually what ends up happening is the creditors end up getting new stock issued to them for most if not all of the company and the old stock gets cancelled. thats why you will see stock trading in companies you thought where bankrupt. It is stock in the new reorganized company. the old stock will trade for a while until such time as it is formally cancelled but usually trades for pennies

an example ,admittedly not a good example because of how the BK was filed is GM. the holders of the old GM stock now own stock in a company called motors liquidation company. they dont own anything in the new GM. the old stock was listed as MTLQQ.PK. it continued trading until march of this year. the value at the end was 4 cents. the stock hasnt actually been canceled yet AFAIK but it it worthless.

Its very rare that a stock in a BK company ends up having any value

[ret5hd]

6. thank you for the straight-forward reply.

[Fuddnik]

7. I used to work for a division of LTV Steel.

They went into bankruptcy two different times. Stock holders were wiped out both times.

New stock was issued the first time, but nobody got any for being a stockholder when or after they filed. If they wanted any of the new stock, they had to buy it.

They were liquidated the second time, and some of the creditors got everything. Stockholders, zilch.