Posted on 12/30/2010 9:44:42 AM PST by MeneMeneTekelUpharsin
TEMPE, Ariz. (AP) -- US Airways Group Inc. said Tuesday that it agreed to extend by more than three years a deal to use Mesa Air Group Inc. to operate some of its regional flights while reducing payments to Mesa. Mesa, which is operating under bankruptcy protection, will fly for US Airways through September 2015 under what the companies called a nonbinding term sheet.
(Excerpt) Read more at finance.yahoo.com ...
I suspect it has something to do with Chapter 11 vs. Chapter 7.
Once they go into Chapter 7, it's a fire sale.
Is the stock still viable after Chapter 7? Does it still trade on the Pink Sheets?
it’s a future value play. they’re betting the company will be worth something in the future, even if it isn’t now.
when oil prices collapsed in the early eighties, Crystal Oil went under. The stock was trading around ten cents a share and it wasn’t even worth that. A buddy gambled a couple thousand that it would come back. Ten years later the stock was above $2 and my friend had made more than 10x his investment.
Well, there is no scientific, absolute valuation. The notion/delusion that valuations can be assigned with any precision, which it can not, is the core building block for Marxist, social planners of all leftist types, although even Lenin knew that valuations were only know in a free market( that’s why he didn’t want total take over of the economy, because he need to know prices for planning purposes. The fact that he took over 90percent, and had effectively destroyed free market pricing, never occurred to him.) To throw the other wrinkle in valuation, is valuation of the same company, over time in a changing economy.
Anyways, in this case, people see potential value after bankruptcy, or cash flow under bankruptcy, or being bought out. Who knows?
Unlike government ‘investments’ you are not forced as a taxpayer to participate.
That is a positive note. I just wonder how Lehman shares can trade for .046 each when no exists for an ongoing operation. Seems like someone just arbitrarily sets the stock value to suit himself/herself. And, how do some of these bankrupt companies end up trading for around $1 per share. That would be a 900-1000% gain off of a .01-03 investment which would be awesome.
If companies can keep operating and producing some kind of cash flow, then the U.S. government can do the same once bankrupt, can’t it?
The answer is simple. The common shares of the truly bankrupt do not have any inherent value, but idiots trade them anyway. Their only hope is a bigger fool who will pay more.
Oh, I get it. So, the stock DOES have a chance of jumping up in value?
Easily, actually. Think back to the leveraged buyout days of the 80s. A lot of companies that had good underlying fundamentals simply took on too much debt. The model was good but it wasn’t good enough to service debt. A Lehman may have a good retail or investment banking model but was done in by an unforseen risk (which probably should have been forseen). The liability generated by the risk was greater than the ability of the remainder of the company to generate cash to pay it off so it folded. That doesn’t mean that the rest of the company doesn’t have value. Shareholders are betting that the productive part of the company will be relieved of the burden. Now some companies have not productive parts—the classic case of the buggy whip company or the steel mill with 1920s equipment, an uncompromsing union and real property loaded with environmental toxins. Those have no value and simply shut down (see Pittsburgh in the 70s).
Oh, I get it. So, the stock DOES have a chance of jumping up in value?
Oops. My connection locked up and I posted again. Sorry.
You are mixing up two things. While from a corporate point of view, it is true that there may be operating cash flow in some parts of such a company, that value no longer belongs to the former shareholders. The senior and junior bondholders are ahead of them in line, and are entitled to whatever future value is there. The equity of the former shareholders is wiped out.
Oh, okay. So, why do the shares jump up in value anyway? That always amazes me.
We’re asking why a company would still have share value if it is bankrupt. People are betting that the company has value beyond the debt. Debt gets worked out all the time. Junior debt gets converted into equity. Senior debt gets a new payment schedule and maturity date. In many cases, bringing the interest rate down or converting it into a kicker gives value back to the shareholders.
Kind of like how supposedly your hair and finger nails grow after death. Or you become worm meat. So, I suppose at some base, organic level the government, or what’s left of it like some ancient royal household, like Savoy, would have use to someone. Again, there are no absolutes.
Thanks for your input and the information. I am grateful for your time.
That is true of a chapter 11 bankruptcy, but not of a chapter 7. In the later case, all assets go to the bondholders, and there is no equity left for the former stockholders, who are left holding a worthless corporate shell.
This is certainly the case with WaMu and Lehman. Even the bondholders took big losses.
Well stated.
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