BUT, if/when that does NOT happen, will go trustee … as (new management is NOT sufficient fraudulent transferee to offset million$ in debt) REV In BT (C-lender) loans $4M to Bay Plastics (“target corp.”), Bay Plastics, $3.5M of which goes to BPI (AV) via corporate note (disguised gift)… BPI gives this $3.5M to Bay Plastics’ old SHs in exchange for Bay Plastics’ stock… BT holds in Bay Plastics’ assets (Bay Plastics AND BPI note/SI merge, maintain Plastics” name) YES fraudulent transfer “Bay Other way to accomplish BT instead loans $$ directly to BPI (which LBO has NO assets at the time), takes w/ (w/ Bay Plastics’ note/SI AAP clause assets as AAP) analysis is Bay Plastics (in)solvent?… Balance sheet Pre-LBO $6.7M in $5.5M in $1.1M in assets, liabilities, equity (YES solvent) Why pay $3.5M for Bay Plastics (if ONLY $1.1M)? equity listed on at book value (market value MAY assets balance be appreciating)… AND, worth of company NOT limited to on equity balance … (corp. itself as annual source of income) sheet Post-LBO $7M in $9M in NO (NOT assets, liabilities, equity solvent) As per $2.25M in (cost of in excess of book goodwill assets value), Bay Plastics actually (barely) solvent $250K in equity… BUT, even though is a generally accepted goodwill … accounting principle, it is ignored by bankruptcy judges NOT an (can’t be sold) goodwill Here, parties accept BUT, normally, expert balance sheet… testimony required re: value of (expensive for assets/liabilities trustee) Nothing at risk for purchaser (new SHs/AV) at LBO… If Bay Plastics succeeds, then purchaser has bought for NO $$ down If Bay Plastics then purchaser walks away (ONLY corp. is liable for debt) after corp. takes on huge debt… BUT, expected to Historical projections LBO, earn its way out of debt based on (which MAY not sustain performance” “past in long-term)
… BUT, if/when that does NOT happen, trustee will go as fraudulent transferee (new management is NOT sufficient REV to offset million$ in debt) In Bay Plastics, BT (C-lender) loans $4M to Bay Plastics (“target corp.”), $3.5M of which goes to BPI (AV) via corporate note (disguised gift)… BPI gives this $3.5M to Bay Plastics’ old SHs in exchange for Bay Plastics’ stock… BT holds note/SI in Bay Plastics’ assets (Bay Plastics AND BPI merge, maintain “Bay Plastics” name) YES fraudulent transfer Other way to accomplish LBO BT instead loans $$ directly to BPI (which has NO assets at the time), takes note/SI w/ AAP clause (w/ Bay Plastics’ assets as AAP) Balance sheet analysis is Bay Plastics (in)solvent?… Pre-LBO $6.7M in assets, $5.5M in liabilities, $1.1M in equity (YES solvent) Why pay $3.5M for Bay Plastics (if equity ONLY $1.1M)? assets listed on balance at book value (market value MAY be appreciating)… … AND, worth of company NOT limited to equity on balance sheet (corp. itself as annual source of income) Post-LBO $7M in assets, $9M in liabilities, NO equity (NOT solvent) As per $2.25M in goodwill (cost of assets in excess of book value), Bay Plastics actually (barely) solvent $250K in equity… … BUT, even though goodwill is a generally accepted accounting principle, it is ignored by bankruptcy judges goodwill NOT an (can’t be sold) Here, parties accept balance sheet… BUT, normally, expert testimony required re: value of assets/liabilities (expensive for trustee) Nothing at risk for purchaser (new SHs/AV) at LBO… If Bay Plastics succeeds, then purchaser has bought for NO $$ down If Bay Plastics then purchaser walks away (ONLY corp. is liable for debt) Historical projections after LBO, corp. takes on huge debt… BUT, expected to earn its way out of debt based on “past performance” (which MAY not sustain in long-term)
Bankruptcy_Schechter-Fall-2009.docx