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Robinhood & Hertz: The Troubling Saga Of A Bankrupt Stock
Interesting article that reminds me of the dot-bomb days when companies like Pets.com were trading like crazy even though they were not prefitable. Actually, this is worse, because today, the frenzy is around companies that are insolvent, rather than merely being unprofitable.
https://www.forbes.com/advisor/investing/robinhood-bankrupt-hertz/
If you’re new to self-guided investing, it could be tempting to hop aboard the bankrupt stock bandwagon and ride a rally. But it’s a highly risky and often fruitless pursuit. Why? Common equity holders face an overwhelming risk of getting wiped out entirely when a company goes through the Chapter 11 bankruptcy process.
The Securities and Exchange Commission (SEC) describes investing in companies that have filed for Chapter 11 bankruptcy as “extremely risky” and warns doing so is “likely to lead to financial loss.” Creditors and bondholders typically become the new owners of a company’s shares while it goes through the reorganization process—in nearly all cases, that means existing equity shares are canceled so secured and unsecured creditors can be compensated in the form of new equity.
Additionally, bondholders stop receiving interest and principal payments during bankruptcy, and stockholders stop receiving dividends. If a company emerges from bankruptcy, its post-bankruptcy shares could be reinstated to investors and, according to the SEC, could be fewer in number and worth less than the original shares. In the worst case scenario, the bankruptcy court could determine that stockholders won’t receive anything after reorganization because the company in bankruptcy is insolvent, meaning its liabilities exceed its assets.
General Motors filed for Chapter 11 bankruptcy in 2009 at the height of the Great Recession. Common shareholders who owned GM stock before its reorganization had their holdings cancelled in March 2011, and were not issued any post-bankruptcy shares.
The Securities and Exchange Commission (SEC) describes investing in companies that have filed for Chapter 11 bankruptcy as “extremely risky” and warns doing so is “likely to lead to financial loss.” Creditors and bondholders typically become the new owners of a company’s shares while it goes through the reorganization process—in nearly all cases, that means existing equity shares are canceled so secured and unsecured creditors can be compensated in the form of new equity.
Additionally, bondholders stop receiving interest and principal payments during bankruptcy, and stockholders stop receiving dividends. If a company emerges from bankruptcy, its post-bankruptcy shares could be reinstated to investors and, according to the SEC, could be fewer in number and worth less than the original shares. In the worst case scenario, the bankruptcy court could determine that stockholders won’t receive anything after reorganization because the company in bankruptcy is insolvent, meaning its liabilities exceed its assets.
General Motors filed for Chapter 11 bankruptcy in 2009 at the height of the Great Recession. Common shareholders who owned GM stock before its reorganization had their holdings cancelled in March 2011, and were not issued any post-bankruptcy shares.
