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TeachMeFinance.com - explain reorganization reorganization -- the altering of a firm's capital, organizational, and/or management structure following a plan worked out during bankruptcy proceedings under Chapter 11. The objectives of a reorganization are to eliminate the cause of the failure, settle with creditors, and allow the firm to remain in business.
Reorganization -- When the financial reconstruction or rehabilitation of a railroad or other corporation is voluntary that is, by concurrence of the security-holders the term readjustment applies. When the financial reconstruction is compulsory that is, when it is effected by a receivership and foreclosure the term reorganization applies. Most reconstructions are compulsory; they seldom can be effected except by legal process following insolvency. The method of reorganization is ordinarily as follows : After default has been made in interest on bonds , say the first mortgage bonds , a receiver is appointed, after which a plan of reorganization is formulated. Provision usually is made in the plan whereby the first mortgage bonds, together with the accumulated unpaid interest, are to be paid in full. Such holders as may desire to do so take for their bonds bonds of a newly formed company, with perhaps stock for the unpaid interest. Such holders as prefer cash for their bonds and unpaid interest are paid in cash. It sometimes is the case that the holders of bonds who take bonds of the new company for their old bonds receive the unpaid interest in cash. The money to pay those bondholders who prefer cash (and to pay unpaid interest if it is to be paid in cash) and to provide other needed funds and working capital is raised by levying an assessment on the stock (on the holders of the stock at so much per share). Then, an order for a sale of the property under foreclosure is obtained from the court (the property being under the control of the court after the appointment by it of a receiver). The sale wipes out the bonds and the stock. The proceeds of the sale, however, must go toward the liquidation of the mortgage debt. The property (generally) is bid in by a committee of the bondholders for the benefit of the bondholders. The reorganization plan (generally) is primarily in the interest of the bondholders and only secondarily in the interest of the stockholders. After the formulation of the reorganization plan and previous to the sale of the property an underwriting syndicate is formed which agrees to take, pay for and make exchange of the bonds the holders of which prefer cash and to pay the assessment on stock the holders of which decline to pay the assessment. The syndicate receives new stock for the old stock on which it pays the assessment, which old stock the holders who do not pay the assessment lose entirely by reason of its being wiped out by the sale under foreclosure. The syndicate (generally) receives a commission (in new securities or cash or both) on the whole issue of new bonds and the whole issue of new stock for guaranteeing the reorganization plan for agreeing to pay for and exchange for new bonds such old bonds as are not exchanged by the holders and for guaranteeing to pay the assessment on stock the holders of which decline to pay it. As a rule an underwriting syndicate has to pay for few bonds, the holders preferring to exchange, or in other words, convert them into new bonds ; likewise, the syndicate as a rule has to pay the assessment on no large proportion of the stock, the holders, for the most part, preferring to pay it. New securities (either bonds or stock) are customarily given for the assessment on the stock (as a compensation for the assessment money paid). Sometimes there is an assessment on the bonds, as when the property is not worth the amount of the bonds ; sometimes, also, new bonds for a less amount are given in exchange for the old bonds ; and usually the interest on the new bonds is at a lower rate than the interest on the old bonds. Second mortgage bonds or other bonds subsequent "in lien to the first mortgage bonds are usually subjected to assessment; new securities are almost invariably given as compensation for the assessment. Also see Readjustment. About the author
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