When finance professor Kevin Kaiser joined Wharton four years ago, he did so in part for the opportunity to teach Distressed Investing and Value Creation. The course has two overarching purposes: to familiarize students with the dynamics of restructuring struggling companies, and to help them apply financial theory to real-world management and investment decisions in order to drive value for firms. On the second point, Kaiser says: “Maximizing value is very different from managing for profit, share price, or market share. Opportunities need to be seen from the perspective of the fully diversified portfolio, rather than from the narrow perspective of the management team or current investors.” This strategy, Kaiser says, can help companies steer clear of distress altogether.
Taught to MBAs and undergraduates, the course last year also inspired an Executive Education program that has attracted executives and investors seeking to navigate COVID-era uncertainty. A sampling of course readings offers further insights into big-picture takeaways for maneuvering and avoiding distressed situations.
“The Hertz Maneuver (and the Limits of Bankruptcy Law)”
This essay on Hertz’s recent Chapter 11 proceedings analyzes the rental-car company’s attempt to finance its bankruptcy by issuing new stock to individuals. The plan, prompted by Robinhood app users who piled into the company’s stock following its bankruptcy, ground to a halt over concerns Hertz was tricking people into bad investments. Ultimately, that wasn’t the case, and many individuals who had invested in the company saw their bets pay off. Kaiser refers to this essay in discussing the case’s implications, which include questions over whether individuals should be able to make such investments and how institutional investors in a company’s equity should be treated in bankruptcy cases.
“The Energy Patch: Where Rights Offerings Are ‘Sexy’ Again”
Students read this Reuters article to learn about the use and recent history of rights offerings, which give creditors in a bankrupt company the chance to buy additional shares at discount. In particular, Kaiser says, “Rights offerings continue to be an important feature in Chapter 11 plans of reorganization mainly because they are very popular with distressed investors as a mechanism to provide them with upside potential post-reorganization.”
“Bankruptcy Court Is Latest Battleground for Traders”
“The bankruptcy process was created decades ago as a way to give ailing businesses a chance to heal and creditors a shot at repayment,” write journalists Mike Spector and Tom McGinty in this Wall Street Journal piece. But in the more than 40 years since the passage of the current bankruptcy code, sophisticated investors have found ways to enter the process with the sole purpose of quickly making money, says Kaiser. Those investors, though, he adds, have also decreased companies’ average time in Chapter 11 — a process that has often been decried as cumbersome — and increased access to funding. Kaiser uses this article as a way for students to contemplate the role and relevance of key players in the bankruptcy process. “If the road to hell is paved with good intentions,” he says, “perhaps some of the paving stones on the road to heaven were placed there by people with bad intentions.”
“Coming Through in a Crisis”
Published in the Journal of Applied Corporate Finance in the wake of the 2008 financial crisis, this article directly takes on criticisms regarding the efficiency of Chapter 11, arguing that the process has been improved over time. Its evolution, author Stuart C. Gilson contends, has been helped along by changes both legal and institutional as well as by new options for financing. Gilson also weighs the role of out-of-court restructurings in reviving businesses and touts prepackaged and pre-negotiated filings as innovations that “combine the most attractive features of Chapter 11 and out-of-court restructuring.”
“Chapter 11: Not Perfect But Better Than the Alternative”
During the course, Kaiser draws on the expertise of James H.M. Sprayregen — one of the bankruptcy world’s most prominent figures, an instructor for Wharton’s Corporate Restructuring course, and an author of this piece in the Journal of Bankruptcy Law and Practice. The article, Kaiser says, “is essential learning for participants in the course,” providing a high-level explanation of the importance of the Chapter 11 process in reallocating resources such as real estate and money for uses that best serve society.
Published as “When the Going Gets Tough” in the Fall/Winter 2021 issue of Wharton Magazine.