CHAPTER 9. BANKRUPTCY PROCEDURES (iv)Automatic Financial Restructuring. Bankruptcy automatically trig- gers conversion of all debt to equity. The problem is there is no punishment for management and hence no bonding role for debt 9. 2 The AHM-Bebchuk procedure The goal of a good procedure is (i) it maximizes ex post value of the firm(with appropriate distribution across claimants) and(ii) it preserves the(ex ante) bonding role of debt by penalizing management adequately in bankruptcy states When bankruptcy occurs, all debt is immediately cancelled. The new firm is all equit A judge is appointed to supervise the process. He has two taskes:(A) solicit cash and non-cash bids for new all-equity firm;(B) allocate rights to the shares in the firm Task A: Soliciting Bids. There is no difference between soliciting bids for the assets of the firm and a proposal to run the firm as a going concern, once non-cash bids are allowed. E. g the management could offer to buy the firm by offering one share in the new(identical) firm for each share in the old firm Task B: Allocating rights, Assume that the value of the claims is settled as under existing procedure( Chapter 11 or Chapter 7). Then there are n classes of creditors(i=l, ...,n) who are owed D1, Dn, where 1 is most senior, 2 next most senior, etc. Shareholders are class n+1 Suppose that V is the publicly known value of the firm. Then class i receives Si, where S1= minV, D1h and Si is determined recursively by the formula S2=mn{-∑S,D},=2,…,n and the shareholders receive what is left over nce v is not known. bebchuk has constructed the following scheme2 CHAPTER 9. BANKRUPTCY PROCEDURES (iv) Automatic Financial Restructuring. Bankruptcy automatically trig￾gers conversion of all debt to equity. The problem is there is no punishment for management and hence no bonding role for debt. 9.2 The AHM-Bebchuk procedure The goal of a good procedure is (i) it maximizes ex post value of the firm (with appropriate distribution across claimants) and (ii) it preserves the (ex ante) bonding role of debt by penalizing management adequately in bankruptcy states. When bankruptcy occurs, all debt is immediately cancelled. The new firm is all equity. A judge is appointed to supervise the process. He has two taskes: (A) solicit cash and non-cash bids for new all-equity firm; (B) allocate rights to the shares in the firm. Task A: Soliciting Bids. There is no difference between soliciting bids for the assets of the firm and a proposal to run the firm as a going concern, once non-cash bids are allowed. E.g., the management could offer to buy the firm by offering one share in the new (identical) firm for each share in the old firm. Task B: Allocating Rights. Assume that the value of the claims is settled as under existing procedure (Chapter 11 or Chapter 7). Then there are n classes of creditors (i = 1, ..., n) who are owed D1, ..., Dn, where 1 is most senior, 2 next most senior, etc. Shareholders are class n + 1. Suppose that V is the publicly known value of the firm. Then class i receives Si, where S1 = min{V,D1} and Si is determined recursively by the formula Si = min{V −X j<i Sj , Di}, i = 2, ..., n and the shareholders receive what is left over Sn+1 = V −Xn i=1 Si. Since V is not known, Bebchuk has constructed the following scheme