Question

As an investor, would you consider investing in a company that has filed Chapter 11? Why or why not?

Answer 1

This is the most common type of corporate bankruptcy for public companies. In a Chapter 11 bankruptcy, a company continues normal day-to-day operations while ratifying a plan to reorganize its business and assets in such a way that will meet its financial obligations and eventually emerge from bankruptcy.

Normally achieving more than average return involves out of box thinking but how the money could be made from company which goes bankrupt. A company which filed for bankruptcy means the opeartion is not runing well. Comapany is facing liqidity crunch for its day to day opeartion even though its product are good. When a company declares bankruptcy, people are not happy because owners lose almost everything they have and creditors get only a fraction of what they lent.

As a result, when the company emerges from bankruptcy reorganization and issues new shares to these two groups of stakeholders, the shareholders are usually not interested in holding them in the long term. In fact, most of them dump the shares rather quickly on the secondary market.

Another threat to bankruptcy investing is so-called vulture investors. These are investment groups that specialize in buying large stakes in companies operating under Chapter 11 before new shares are issued so they are guaranteed a large amount of post-bankruptcy shares. These groups have already discovered the value, and are often the first sellers after the stock has recovered post-bankruptcy.

So, when is a good time to invest? The key is doing some research or due diligence. Look for companies with solid fundamentals that only entered bankruptcy due to extreme circumstances. Failed buyouts, unfavorable lawsuits and companies with identifiable liabilities (such as a bad product line) typically make good post-bankruptcy investments. Stocks with a low market cap are more likely to be mispriced after a bankruptcy. Furthermore, stocks with low market caps and liquidity are often ignored by vulture investors and, therefore, may represent better values than those already picked up.

The bankruptcy reorganization process is long and complex. However, some public companies are able to emerge from it and become profitable again. These companies may represent some of the best undervalued investment opportunities for successful investors to profit from in today's market.

There is still a host of risks associated with investing in such companies emerging from bankruptcy. The problems that brought the company into bankruptcy in the first place may still exist, and the scenario could be likely to repeat itself.

So its not easy to invest in companies which filed in Chapter 11 as there is common pharse in financial market that " don't through good money after bad money", however if one could do some research and find the reason for chapter 11 filing like Failed buyouts, unfavorable lawsuits and companies with identifiable liabilities (such as a bad product line) typically make good post-bankruptcy investments, if these are the reasons, one could invest with proper research.