When firms emerge from Chapter 11 bankruptcy the final agreed court approved plan of reorganization sets out the revised claims of debt and equity holders. Typically the predecessor equity holders and the most junior priority debt holders lose everything and the most senior priority debt is honoured. The plans of reorganization embody the various negotiating positions of debt holders and when a plan is finally approved the claims are formalised in the form of Fresh Start (FSA) accounts which revalue all net assets. In this research we show that the reliability of the FSA values is dependent on the presence of activist vulture funds following a loan to own strategy. Moreover, FSA valuations depend on the position that vulture funds hold in the capital structure of the distressed firm. When vulture funds hold the senior part of the intermediate priority debt they are able to introduce downward bias into the properties of FSA values at emergence from bankruptcy, only for these values to reverse in subsequent periods creating opportunities for high investment returns. Hence we shed empirical light on the claim by some legal scholars that vulture funds may get control of Chapter 11 firms too cheaply.

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This talk is associated with the following record:

• Fresh Start Valuation of US Firms Emerging Bankruptcy