Preferences of Creditors Towards Formal Bankruptcy Or Restructuring In the Course of Bankruptcy (The Case of “Transaero” Company)

Abstract

This article is a case study of the bankruptcy of the Russian carrier company “Transaero” that took place in 2015 aimed to reveal the preferences of creditors of financially distressed companies between formal bankruptcy and restructuring. We suggest that the creditors of “Transaero” have chosen its bankruptcy because its liquidation value was significantly higher than its going concern value. Using data on plane sales we estimated statistically the market value of airplanes by plane type depending on their age. It gave us the better estimate of the value of Transaero’s fleet. According to our estimate the liquidation of the company will lead to the 75 % debt recovery for its debt holders. Then we modelled the hypothetic restructuring that included asset sales and return of a number of planes in financial lease to the leasing companies, and in total we got rid of 35 planes. This restricting could bring the debt down by 22 % but under no future cash flow scenario the company would be able to serve its debt. The enterprise value of “Transaero” as a going concern is less than its liquidation value hence the value of its equity is negative. The future cash flow to the firm is less than annuity payments needed to serve and to pay out debt. In case of restructuring the creditors’ losses would have been in the range of 60 % to 78 %. Thus, we concluded that the choice of the creditors was rational.

Keywords:

bankruptcy, restructuring, market value, liquidation value, asset sales, preferences of creditors