Buy stock in a company in Chapter 11?

[Tim Hancock]

Disclaimer: I am an engineer and hate dealing with finances!

While I rarely dabble in the stock market, I am considering buying a couple few thousand shares of Dana Corporation (DCNAQ). If it can still be traded, how stupid would it be to buy stock in a company that filed Chapter 11 in 2006? The company is based in Toledo, and I doubt that they will go under. I have read that the stock can simply become worthless somehow depending on how the reorganization washes out. Anyone know anything about this kind of a situation (keep in mind I do not know squat about the subject matter )?

I guess the worst case is I could lose a few grand, but if the company comes back strong, I am guessing that I could make out good. A few years ago, I did something like this with a couple of other well known local companies (Owens Illinois and Owens Corning) and made a nice chunk of change.

Any suggestions from guys in the business who know something about this would be greatly appreciated.

[Super_Dave_D]

The company (a fortune 500) I work for has just exited Chapter 11 and all stock was completely worthless when we exited. They issued new stock to pay off creditors. Your consideration is risky but you already know that.

[MikeSid]

Take a look at the recent history of KALU (Kaiser Aluminum). If you bought while it was in BK11 your stock would be worthless. The reorg plan called for cancelling all outstanding shares and a new offering.

Now.... if you bought on the day after the effective date of the plan of reorg...well... then you'd be in damn fine shape today

[competentone]

Originally posted by Tim Hancock
Disclaimer: I am an engineer and hate dealing with finances!

If you're going to start investing in stocks of companies in bankruptcy, then you had better start to LOVE finances!

Start by reading all their latest SEC filings:

http://www.pinksheets.com/quote/filings.jsp?symbol=DCNAQ

You also should be on top of all the bankruptcy activity which won't necessarily be in the SEC filings until it's too late to do you any good.

A quick glance looks as though they got $1.45 billion in financing during their reorganization. You had better know the terms of that financing if you think you're going to get a piece of the business by buying the stock -- odds are the guys who gave them the financing have the company "by the balls"!

From Dana's website:

Dana and certain of our U.S. subsidiaries are operating under Chapter 11 of the U.S. Bankruptcy Code as debtors-in-possession. Information about the bankruptcy proceedings can be found at: http://www.dana.com/reorganization.

WARNING: While we continue our reorganization under Chapter 11, investments in our securities will be highly speculative. Although shares of our common stock continue to trade on the Over the Counter Bulletin Board (OTCBB) under the symbol "DCNAQ," the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain and shares of our common stock may be canceled without any compensation pursuant to such plan.

[Tim Hancock]

Originally posted by competentone
If you're going to start investing in stocks of companies in bankruptcy, then you had better start to LOVE finances!

Start by reading all their latest SEC filings:

http://www.pinksheets.com/quote/filings.jsp?symbol=DCNAQ



From Dana's website:

Dana and certain of our U.S. subsidiaries are operating under Chapter 11 of the U.S. Bankruptcy Code as debtors-in-possession. Information about the bankruptcy proceedings can be found at: http://www.dana.com/reorganization.

WARNING: While we continue our reorganization under Chapter 11, investments in our securities will be highly speculative. Although shares of our common stock continue to trade on the Over the Counter Bulletin Board (OTCBB) under the symbol "DCNAQ," the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain and shares of our common stock may be canceled without any compensation pursuant to such plan.

I read that same warning earlier. Is there a way to find out or make a reasonable guess when the stock could become worthless? I guess this part is unclear to me: "The opportunity for any recovery by holders of our common stock under such reorganization plan is UNCERTAIN and shares of our common stock MAY be canceled without any compensation pursuant to such plan." The terms "uncertain" and "may", are not very informative. I rarely think about dabbling in the market (as I have admitted that I am not well versed in it), but if I have a 50/50 chance of making a killing on this one, I might roll the dice (only talking about a couple thousand, so if it goes south, it would not be the end of the world).

[MRM]

The problem is that although the company does not go under, the previous stock almost always gets declared worthless because the secured creditors take whatever money there is at cents on the dollar. That leaves nothing for the common stock holder. The company issues new stock in the company that emerges from bankruptcy. The new stock is what you want to buy.

Don't play with things like this unless you are a serious professional. Like blackjack, you might get lucky once in a while and make a bet that beats the pros, but the odds are heavily in the house's favor.

[MRM]

The Bankruptcy judge is the one who makes the decision. The odds against you are not 50-50, they are more like one in ten or twenty. If the market, which includes professional money managers assesses the value of the stock at whatever it is, what makes you think there is an upside potential to make a killing on that they all have missed? The current stock price reflects that the odds of losing everything are vastly greater than the possibility of making a kiling.

[competentone]

Originally posted by Tim Hancock
I read that same warning earlier. Is there a way to find out or make a reasonable guess when the stock could become worthless? I guess this part is unclear to me: "The opportunity for any recovery by holders of our common stock under such reorganization plan is UNCERTAIN and shares of our common stock MAY be canceled without any compensation pursuant to such plan." The terms "uncertain" and "may", are not very informative. I rarely think about dabbling in the market (as I have admitted that I am not well versed in it), but if I have a 50/50 chance of making a killing on this one, I might roll the dice (only talking about a couple thousand, so if it goes south, it would not be the end of the world).

Those statements are written by attorneys, they are written with the intent of not saying anything with certainty. If they "lead" toward a conclusion, the company and its officers open themselves up to lawsuits.

I'd have to look over the company and its situation very carefully to draw a conclusion, but most of the time, Chapter 11 reorganization results in existing shares ending up being cancelled. The creditors lending the company money while the company is in bankruptcy are first in line, they are followed by the other creditors, you will be way down the list of importance during the reoganization.

There are turn-around stories about companies coming out of bankruptcy and people making good money on them. Most of the time those making money on companies in bankruptcy are not "gambling" though -- they are doing a lot of work understanding the financial picture of the company.

I guess that's the biggest problem I have with what I'm hearing from you, it sounds like you are willing to take a "gamble" instead of making a speculative investment.

[Tim Hancock]

Thanks guys, a friend just helped explain it to me also. I did not understand the issuance of new stock. I feel kind of stupid for what surely must seem like a stupid question to all those who understand these type of deals.

Thanks again for the responses!

[MRM]

It's not a stupid question; it's actually a good thought. I only know about it because I thought the same thing about K-Mart when they went through bankruptcy, and then Northwest Airlines, which is local to me. I didn't figure it out until someone explained it to me, much more recently than I would like to admit.

[the]

The last people to be paid in a bankruptcy are the equity holders, i.e. the owners/shareholders.

Likely, there will be nothing left for existing owners/shareholders. Because if there was, the company probably wouldn't have been in bankruptcy to begin with.

And, to add to that, bky is VERY expensive, esp. a large Chapter 11. The fees involved are through the roof, attorneys' fees, accountants, other experts, consultants, etc. And they are all in the exact opposite position as the equity holders/owners. They get paid FIRST. And they are quite good at milking the bankruptcy estate for all it's worth, rarely leaving anything for anyone, esp. those last in line.