- Pacific Gas and Electric (PCG) has announced that it plans to file for Chapter 11 bankruptcy.
- The existing shares of a company that files for bankruptcy will usually wind up being worthless or worth a tiny fraction of their old value.
- Equity in the company is often used by the bankruptcy courts to compensate creditors, and shareholders are usually the last people to be compensated.
Major West Coast utility company Pacific Gas and Electric Co. (PCG) is planning to file for Chapter 11 bankruptcy, it announced on Monday, following its announcement on Sunday evening that CEO Geisha Williams stepped down from her position leading the company. The move comes as the California utility — which serves some 16 million Golden State customers — is facing legal liabilities that could reach more than $30 billion for the role that its faulty equipment might have played in some of California’s wildfires in recent years.
But, for shareholders in Pacific Gas and Electric, the news raises an important question: What happens to its stock during this bankruptcy filing?
Bankruptcy Isn’t Always the End…
It’s a common misconception that filing for bankruptcy is essentially the same as going out of business, but bankruptcy is actually — more often than not — a way to stay open.
When a company files for Chapter 11 bankruptcy, it is essentially admitting that it’s currently shouldering more debt than it could realistically hope to pay off in the course of its normal business operations. However, a Chapter 11 filing means that same company also believes that it could operate profitably again should it be able to reach an acceptable compromise with the people holding its debt. The company will want those holding the debt to take less than full value, but still most likely more, ultimately, than it would receive if the company just shuttered. This is in stark contrast to a Chapter 7 bankruptcy filing, wherein a company simply opts to close its doors and sell off all of its remaining assets.
…But It’s Usually the End for Your Shares
Unfortunately, this process usually comes at the cost of your investment, more often than not. As a shareholder, you’re essentially a part owner of the company and, unfortunately, that means you’re also on the hook for the company’s debt.
One metaphor might be having a car that you purchased with financing. You might have purchased the car, but if you don’t make the payments, you’ll forfeit ownership and the people who loaned you the money to buy the car will have it repossessed. So, if the company that you and the other shareholders own isn’t paying its debts anymore, bankruptcy usually involves repossessing the value held in your shares and giving it to the people who lent your company money.
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When a company files for bankruptcy, it hands over all decision-making to the bankruptcy court until the company and its creditors can arrive at an acceptable settlement. The court, in turn, sets out to prioritize the debts to determine who gets paid in what order. Secured creditors come first, followed by unsecured creditors, and existing shareholders bring up the rear.
As a shareholder, there could, hypothetically, still be some actual value left over for you when the process is completed. But if a company could pay off all of its debts and still have something substantial left for shareholders, why would it be going into bankruptcy in the first place? That’s why it’s probably safe to assume that — even if you do get something for your shares in the end — it’s not likely to be much.
Trading a Bankrupt Company’s Stock
Although your shares will probably prove worthless, that’s not always completely clear from the outset. In the meantime, shares can still be traded if you can find a willing buyer. Although a bankrupt company will almost certainly have its shares delisted by the Nasdaq composite or the New York Stock Exchange, the shares might still trade on the over-the-counter markets. In this case, shares of a company that has entered bankruptcy will have a “Q” as the final letter in their ticker to indicate their status.
Meanwhile, there might be new shares of the stock issued without being authorized by the company. These are usually used to compensate creditors for money they loaned the company but won’t be getting back. Those shares will have a ticker symbol that ends with a “V” to indicate that they’re shares involved in bankruptcy and exist “as issued.”
But why would anyone buy stock in a company that’s bankrupt? Turns out, there is a small cadre of speculators who specialize in buying and selling shares of companies in bankruptcy — an incredibly risky and unlikely but potentially lucrative practice.
Seeing shares of a company in bankruptcy jump to $0.02 a share based on good news about the bankruptcy proceedings might not mean a lot to someone who bought them for $20 apiece a year ago, but someone who bought them two days ago for $0.01 a share just doubled their money. It’s an incredibly risky way to invest, but the chance for huge returns will attract a certain group of people with detailed and intimate knowledge of bankruptcy filings and a hearty appetite for taking some big chances.
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