Bankruptcy & Capital Restructuring For years, RadioShack retailer that helped br

Question

Bankruptcy & Capital Restructuring For years, RadioShack retailer that helped bring personal computers to the masses outlasted untold predictions that it would buckle in the face of bigger rivals and online competitors. But its clock has finally run out RadioShack, a long-ailing 94-year-old electronics chain, filed for bankruptcy protection on in February, 2015 after striking a deal to sell up to 2,400 of its stores to the wireless service provider Sprint and a hedge fund that is its biggest shareholder The Chapter 11 filing, made in federal bankruptcy court in Delaware, took few unaware. RadioShack had not turned a profit since 2011, and its fate had been a regular topic of speculation in the retail and corporate restructuring circles. "The surprise is that they survived this long," said Michael Pachter, an analyst at Wedbush Securities. "I didn't think they'd last through Christmas 2013 But RadioShack is poised to live on, at least in much diminished form. Sprint and the hedge fund Standard General agreed to buy 1,500 to 2,400 of RadioShack's 4,000 company-owned stores in the United States. Sprint is expected to run special "store within a store" departments in up to 1,750 of those stores. As so-called stalking-horse bidders, Sprint and Standard General will have to compete with potential rivals in a court-supervised auction. The remaining company-owned stores will then be closed. Until then, RadioShack will continue to operate normally through the hapter 11 process. Part I With Radio Shack as your example, please define what the Chapter 11 bankruptcy protection is, how is it different from a Chapter 7 bankruptcy filing? Part II With your knowledge of Capital Structure management, how would a restructuring of a firm like Radio Shack allow it to survive beyond a Chapter 11 filing?

Explanation / Answer

Part I: Under Chapter 7 bankruptcy, the assets of the company are liquidated to pay off the creditors. Basically, debtors are sold to pay off the creditors. The proceeds from selling secured assets are provided to their respective creditors. Chapter 11 bankruptcy is also known as Reorganization or Rehabilitation bankruptcy. This allows company to restructure its loans by extension of tenor of loan or lowering of interest rate etc. in order to aid company in continuing its business.Here, assets of the company are not liquidated.

Part II- Under Chapter 11 filing, the firm can negotiate with existing creditors terms of the loan availed such as change in interest rate, loan tenure etc. in order to continue operating its business. With the new investors coming up with fresh equity in the business will help in paying off existing debt and business revival and expansion. Thus with the change in capital structure i.e. reduction of debt and introduction of fresh equity will aid in help business in coming out of stressed situation.

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