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October 04, 2007

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MT57

Prof Baird's analysis is exactly right. The data used by Prof. LoPucki and the analyses performed on the data have the illusion of reliability but in the real world they are completely off base. First, book value is meaningless as an indicator of value for any company, solvent or not. Seoond, a debtor's petition date valuations are completely unreliable. The debtor might spend 3 - 5 minutes discussing with counsel what to say about value in the petition and for public companies, the answer will normally be "use the numbers in your last public filing, none of the creditors really pays attention to that field anyway." Third, firm size is only weakly correlated with ability to reorganize. Fourth, and most important, as Prof Baird's example of ABC-Naco illustrates, the study misses completely the key drivers of why a 363 sale is selected to resolve a distressed situation: it is not absolute EBITDA or absolute value that matters. What matters is the ability of a debtor to generate sufficient positive cash flow in chapter 11 or obtain DIP financing to pay admin expenses and service the secured debt. Many 363's involve companies that have (1) negative cash flow to begin with - for example, many tech companies that went public in the 90s and then went bust had negative cash flow, (2) insufficient cash flow to cover post petition operating expenses, professional fees and secured debt service, (the ABC-Naco example) or (3) a need for a priming dip to stay alive, but cannot obtain one because there is insufficient equity cushion and all the assets are pledged. Most 363 cases occur not because a faithless management has duped the creditors (that is absurd if you actually work in big chapter 11s) but because the secured lenders have lost patience with the company and have told the management they will not support the company's reorganization, but will only allow them enough funds to stay alive for a short while if the company is put up for sale. 363 sales are simply dignified and more efficient chapter 7's, and are not comparable to 11's. The data and analysis behind Bankruptcy Fire Sales are totally unreliable, and a comparison between successful 11's and 363 sales is like comparing groceries to garbage.

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