Lessons in Corporate Finance, 2nd Edition

CHAPTER 13Restructuring and Bankruptcy: When Things Go Wrong (Avaya Holdings)

This chapter will discuss how firms resolve financial distress. Chapter 5, which discussed Massey Ferguson, gave a broad overview of what happens to a firm when it gets into trouble because cash flows are insufficient to meet its required interest and principal debt payments. Massey Ferguson had profitable operations but inconsistent financial policies and a much more levered capital structure (i.e., much more debt) than its competitors. When an economic downturn occurred, Massey Ferguson was unable to pay its debts and was forced to restructure. Its product market position never recovered, and the firm eventually sold its operations.

The purpose of Chapter 5 was to show you that finance matters. It was our introduction to a firm's financial policies and provided a general overview of financial distress. It was not meant to discuss financial distress in detail. This chapter covers how a firm and its creditors operate in financial distress. A firm's actions in financial distress are guided by economics as well as very specific laws on reorganization and bankruptcy.

In this chapter we will use Avaya Holdings Ltd. (AVYA), a 2017 bankruptcy, to illustrate the restructuring and bankruptcy process. We will use this case to discuss the theory and the rules regarding financial distress.

WHEN THINGS GO WRONG

When is a firm in financial distress? Financial distress occurs when a firm is unable to meet its financial ...