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During an economic downturn with a prolonged outlook, some businesses inevitably face severe losses. If they also have weak financial standing, excessive debt, or cannot meet their debt obligations, they risk bankruptcy. At this point, creditors may not recover their full amounts, while shareholders, who are last in line for repayment after all types of creditors, may end up with nothing. The stock will no longer hold any value.<\/strong><\/p>

If the business still has hidden potential, creditors or the business itself may not want to go bankrupt but instead seek court protection to restructure. Creditors will need to assess whether they will recover more through restructuring than by allowing the business to fail. For shareholders, a company filing for restructuring increases the chances that common stock will still retain some value. Whether that value is significant or minimal will depend on the specifics of the restructuring plan and the future business conditions.

The Association of Investment Analysts offers considerations for investing in common stocks of companies undergoing restructuring:

1. How much debt reduction, interest rate cuts, extensions on remaining debt payments, or debt-to-equity conversions will occur? If significant debt reduction happens, stock value will likely increase. Conversely, minimal debt reduction will lead to lower stock value.

For example, suppose a business has assets worth 1 billion baht and liabilities of 960 million baht, leaving 40 million baht for shareholders (with a total par value of 100 million baht but accumulated losses of 60 million baht). Currently, it incurs losses every quarter, and if left unchecked, by year-end, equity could drop to -150 million baht, prompting a restructuring.

Continuing with this example, if creditors agree to reduce debt by 200 million baht, liabilities would then be 760 million baht, while equity would improve from the projected -150 million baht to a positive 50 million baht.

Based on such forecasts, there may be a phenomenon where investors speculate on the stock in the short term. The price will depend on the imagination or assumptions of the investors. However, in the long run, once the facts emerge, stock prices will align with the actual situation.

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2. How much will shareholder equity be reduced? In the restructuring process, creditors will not agree to a plan that solely benefits one side. Legally, if the business goes bankrupt and assets are sold, creditors will receive payment before shareholders. If creditors do not receive full payment, shareholders will be left with nothing.

Therefore, creditors will need to see a reduction in shareholder equity as well, which must be substantial. Looking back at past restructuring cases, there may be a reduction in the number of shares or a decrease in par value, such as from 10 baht to 1 baht. While this does not reduce the total equity, it does lower the overall par value closer to the business's status, often leading to a need for capital increases and more shares, possibly at a new par value of 1 baht or higher, such as 2 baht. However, it is unlikely that payments will be accepted at a high price.

In this case, existing shareholders must carefully consider their options.

There may be requests for creditors to convert some debt into equity, depending on negotiations, and it must be at a level acceptable to creditors. After reducing the par value, converting debt into shares at or above the new par value may be feasible, but if it’s at the old par value, negotiations may be challenging.

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3. How much new capital will actually be raised? As the business restarts under the restructuring plan, which follows a period of stagnation, cash flow will be needed to sustain operations. New capital increases may occur, likely involving new shareholders, with some rights given to existing shareholders. All of this must not be at excessively high prices, as no shareholder would agree to pay high prices for shares.

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4. What major improvements will be made to ensure the company's future profitability to repay debts and reward shareholders, especially new shareholders who need to weigh the risks of holding shares?

If improvements are too minor, the chances of future success may be slim. Therefore, stock investors must assess whether the proposed major improvements are sufficient in various aspects, such as:

: Will the type of business or products remain the same, or will new products be added, or unprofitable products be eliminated? Does this sound reasonable?

: Is there an improvement in the management team, ensuring they have the capability and credibility to lead the business to profitability?

: Are there cost reductions and downsizing in unnecessary areas sufficient?

5. Existing assets may have depreciated or fallen in value from their recorded amounts, including accounts receivable, inventory, real estate, machinery, or investments in other businesses. Especially if excess assets are sold off, the price received may be lower.

In cases of depreciation or declines in value below recorded amounts, these losses will further reduce equity, which is a difficult aspect to analyze in advance, but investors should be prepared for this possibility.

6. The likelihood of successful restructuring and subsequent prosperity is another critical factor that stock investors must analyze. Past cases of restructuring plans have seen both successes and failures, some achieving rapid success while others took a long time.

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Therefore, investing in stocks undergoing restructuring carries both higher opportunities and risks compared to general stock investments. Investors must be prepared and continuously monitor information, as well as conduct thorough analyses.<\/p>

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Thank you for the information from: The Association of Investment Analysts

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