Now the remaining question is: What does that mean for SUNE stock, and anyone left still holding it?
It’s important to remember that when a company like SunEdison files for bankruptcy protection, it is indeed possible that holders of SUNE shares won’t be completely wiped out.
It’s also possible to win the Pick Four.
Yes, there are cases in which a company’s shares have survived Chapter 11 to trade pretty much as they have before. These cases are exceedingly rare. Shareholders in American Airlines parent AMR (which traded OTC as AAMRQ), received a distribution of 0.744 shares of the new American Airlines Group Inc (AAL) for every share of AAMRQ they held.
It’s unrealistic for anyone holding SunEdison stock to expect such a good outcome.
The problem for shareholders is that they are by far and away the last parties to be paid anything in bankruptcy. Lawyers, banks, bondholders — both senior and unsecured — all get something before equity holders. By the time shareholders step up to the counter, there’s usually nothing left.
Sure, the stock can trade through Chapter 11 proceedings, usually OTC. The problem is what happens when the company emerges from bankruptcy protection.
That’s why the Securities and Exchange Commission explicitly warns investors against playing around with companies in Chapter 11. From the SEC (emphasis theirs):
“Note: Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss. Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company’s plan of reorganization will cancel the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company’s assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are usually subject to substantial dilution.”
And lest you think anyone holding SunEdison stock can count on having even a diluted stake after Chapter 11, good luck. As the WSJ reports, the line of parties with claims on SUNE is even longer than usual. Proceedings could even drag SunEdison’s subsidiaries into the mix.
Fortunately for them, the filing doesn’t include SUNE’s publicly traded yieldcos, TerraForm Power Inc (TERP) and TerraForm Global Inc (GLBL). Shares in both companies enjoyed sharp relief rallies on the news.
We would extend the SEC’s warning to any company at risk of declaring bankruptcy, as SUNE was. When media properties such as The Wall Street Journal, Bloomberg and Reuters are reporting that a bankruptcy filing is imminent, they’re not lying. They’re not trying to game the stock. Indeed, they have no skin in the game — financial or personal — at all. They say so because people very close to the situation who are in a position to know tell them. It’s usually the lawyers.
If anything, the media is trying to help you. One study conducted a few years back found that of 41 bankrupt public companies that announced reorganization plans in 2009 and 2010, only four delivered returns to shareholders.
The bottom line is that there are risks with investing in any asset. When it comes to equities, Chapter 11 is as big as they come.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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