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1、Chapter30FinancialDistress853CHAPTER30FinancialDistressIn2006,financialproblemsatGeneralMotorsandchapter.AfirmthatdoesnotgenerateenoughcashFordweremuchinthenews.Bothautomakerswereflowtomakeacontractuallyrequiredpayment,suchassaddledwithlargedebtloadsandlegacycostssuchasaninte
2、restpayment,willexperiencefinancialdistress.retireehealthcarebenefits.Inearly2006,FordreceivedAfirmthatdefaultsonarequiredpaymentmaybemorebadnewswhenitsdebtwasdowngradedbyforcedtoliquidateitsassets.Moreoften,adefaultingStandard&Poor’stoBB–.Meanwhile,GMannouncedfirmwillreorgani
3、zeitsfinancialstructure.Financialthatits2005losswasactually$2billionlargerthanrestructuringinvolvesreplacingoldfinancialclaimspreviouslythought—$10.6billionversus$8.6billion—withnewonesandtakesplacewithprivateworkoutsduetoaccountingerrors.GMstockdroppednearlyorlegalbankruptc
4、y.Privateworkoutsarevoluntary5percentonthenews,shavingmorethanhalfabillionarrangementstorestructureacompany’sdebt,suchdollarsoffGM’smarketcap.aspostponingapaymentorreducingthesizeoftheGMandFordareexamplesofcompaniesexperi-payment.Ifaprivateworkoutisnotpossible,formalencing
5、significantfinancialdistress,thesubjectofthisbankruptcyisusuallyrequired.30.1WhatIsFinancialDistress?FinancialdistressissurprisinglyhardtodeÞneprecisely.ThisistruepartlybecauseofthevarietyofeventsbefallingÞrmsunderÞnancialdistress.Thelistofeventsisalmostendless,butherearesom
6、eexamples:DividendreductionsPlantclosingsLossesLayoffsCEOresignationsPlummetingstockpricesFinancialdistressisasituationwhereaÞrmÕsoperatingcashßowsarenotsufÞcienttosatisfycurrentobligations(suchastradecreditsorinterestexpenses)andtheÞrmisforcedtotakecorrectiveaction.1Finan
7、cialdistressmayleadaÞrmtodefaultonacontract,anditmay1ThisdeÞnitionisclosetotheoneusedbyKarenWruck,ÒFinancialDistress:ReorganizationandOrganizationEfÞciency,ÓJournalofFinancialEconomics27(1990),p.425.853ros05902_ch30.indd8539/26/063:30:28PM854PartVIIISpecialTopicsTable30.1T
8、heLargestU.S.BankruptciesLiabilitiesFirm(in$millions)BankruptcyDate1ConsecoInc.$56,639.30
