1/ The Bankruptcy Ice Cream Truck
There seems to be a lot of confusion about how a bankruptcy process works and how it impacts the various stakeholders involved, so here’s a simple analogy.
Imagine observing an ice cream truck at a carnival on a hot summer day.
2/ It’s very hot and a long line forms. Everyone wants their fill of fresh ice cream.
The Ice Cream Man pops his head out of the window and announces, “Sorry folks, I have a limited supply today. I don’t know how many of you will get any of my ice cream.”
The crowd stirs.
3/ Those at the front of the line - let’s call them the Creditors - are more likely to get their fill than those at the back of the line - the Shareholders.
If the Creditors are particularly malicious, they may even try to screw over the Shareholders by eating double their fill!
4/ Curious, you ask a few Creditors in the front how they feel about their chances. They appear to have mixed feelings about their ability to get their fill.
These metaphorical front of the line “ice cream bonds” are trading at 50 cents on the dollar - unclear recovery of fill.
5/ But then you ask the same to Shareholders in the back, and they appear euphoric, convinced of their ability to get their fill.
Maybe they are just more optimistic than the Creditors, you surmise, but if the front is skeptical, the euphoria of the back is clearly misplaced.
6/ “This all seems very odd,” you say to yourself as you walk away, “I’d rather have fried dough anyway.”
This (admittedly simplified) analogy shows the surface dysfunction of some of what we are seeing in the markets today as it relates to bankruptcy.
I hope it helps!