Pickup trucks sit on the lot at the Laurier General Motors dealership in Quebec City on May 31, 2009.MATHIEU BELANGER
Q: If you own shares in a company that files for bankruptcy protection, do those shares remain intact as the company restructures or is bought out, or do they become worthless?
A: The shares of companies under bankruptcy protection remain in existence, and keep trading as the company restructures. They don't necessarily become worthless at the end of the process, although that is often the result.In some cases, a company will successfully come out of bankruptcy protection and continue as a going concern. But equity holders usually get very little, if anything, under the restructuring plan.
Q: Can you give a specific example?
A: This is essentially what happened to Air Canada. It filed for bankruptcy protection under the Companies' Creditors Arrangement Act (CCAA) in April, 2003, and emerged from CCAA in September, 2004.
At that point Air Canada shares became virtually worthless. They were trading at $2.10 just before the company filed for court protection, but were valued at just fractions of a penny after the restructuring and the creation of new holding company, ACE Aviation Holdings Inc.
Q: More and more companies seem to be taking "goodwill writedowns." What are these?
A: When a company makes an acquisition, it often pays more than the book value of the target's physical assets. This "goodwill" includes the reputation of the business, the value of brands, royalty agreements and other intangibles.
But over the course of time this goodwill may lose some of its value. That has happened with many companies because of the business slump during the recession. Consequently, a lot of companies are taking writedowns of this goodwill, essentially decreasing the value of these assets on their balance sheets. One advantage: Writing down assets decreases shareholder equity, thus boosting return on equity. A disadvantage is that it can diminish a company's capacity to borrow money.
Q: What Canadian companies have made this move recently?
A: There have been quite a few of them, including customer loyalty firm Groupe Aeroplan Inc., nickel miner Sherritt International Corp., telecom equipment maker Aastra Technologies Ltd. and insurer Kingsway Financial Services Inc.