Table of Contents
Marvel 1
Why did Marvel file for Chapter 11? Was it bad luck? Bad strategy? Bad execution? 1
Will the proposed plan solve the problem? 2
Will Marvel debt holders approve the plan? Will public bondholders like Carl Icahn approve the plan? 3
Assess the projections, are they credible? How much is the equity worth according to the plan? 3
Bankruptcy Questions 5
What is a pre-packed Chapter 11? What is the commercial significance of a pre-pack? 5
What is the “right of set off”? 5
What are executory contracts? What right does a debtor/signatory to an executory contract have? 5
Explain what subordination is? How does it apply in Bankruptcy? 6
What is conditions precedent? 6
What are requirements for “plan confirmation”? 6
Explain Preferences? 7
Explain the order of priority of claims 7
What is Perfection? 7
What is the legal significance of a petition filed with the Bankruptcy Court? 8
Marvel
Why did Marvel file for Chapter 11? Was it bad luck? Bad strategy? Bad execution?
Marvel filed for Chapter 11 because of the combination of a bad luck, bad strategy and bad execution. One of the main problems was that Perelman was overly confident about the future of the company, did not anticipate the change in customers' preferences and was wrong in prediction of market trends. Specifically, Perelman couldn’t foresee that video games would gain market share against comic books, cards and stickers and he continued to build the entertainment company without recognizing the competition. Also, there were number of other things that went wrong:
Bad luck with trading cards market because of strikes in the baseball and hockey leagues.
Bad strategy by increasing the number of monthly titles and raising the comic books prices. This resulted in declined sales of comic books due to the disappointed collectors who viewed it as a form of investment.
Adding debt to Marvel by purchasing declining line of business at the premium (SkyBox International Inc acquisition for a 25% premium, while trading cards business was declining)
Overall company’s financial strategy was based on too optimistic growth expectation and didn’t account for change in customer’s preferences toward video games. Marvel continued borrowing and eventually could not serve all the debt with its declining revenues.
Huge amount of Marvel’s shares were collateralized (77.3 million of shares, 75.9% of Marvel as a whole), and the company wasn’t able to pay these debts from their profits.
By filing for Chapter 11 Marvel wanted to restructure the debt in order to avoid a possible Chapter 7 bankruptcy. Perelman was eager to keep the full control over the company, and his proposed plan reflects that.
Will the proposed plan solve the problem?
The proposed plan won’t solve the problem because it doesn’t address the main problem – it doesn’t adjust company’s strategy and execution to the new market environment. In addition the plan requires adding even more debt and even higher degree of collateralization, which will make the company even more vulnerable. Existing Debt/Capital ratio is high enough, and EBITDA/Interest ratio is critically low (and the numbers doesn’t even reflect a full year in 1996):
Will Marvel debt holders approve the plan? Will public bondholders like Carl Icahn approve the plan?
Most likely debt holders, and especially Carl Icahn, won’t approve the plan. There’s a clear conflict over the control (according to the plan, the bondholders would get 15% of shares (77.3 M). The debt holders are concerned that Perelman’s main goal is his own gain only and unhappy with the deep discount he offered to himself. In summary, the debt holders have to choose between accepting the plan, sell the debt at $.14-$.17, or reject the plan and propose their own.
