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CT2 Chap 4

H

HC_ed

Member
Quick question on the core reading, page 29. It says that warrants are often used to compensate creditors in the case of bankruptcy. Won't the shares be valueless in that case - so why would a creditor want to buy shares at the strike price?
 
There's something about this in the CT2 FAQ - hope this helps:

Margaret Wood said:
Question

Why would a creditor want a warrant in a bankrupt company?

Answer

A warrant is an option to buy shares in a company, so it does seem strange that these might be offered to creditors of a bankrupt company. However, if the company is bankrupt, the creditors are unlikely to get much anyway. Also, the administrators of the company might be able to sell off some assets or some whole parts of the company, reschedule some loans and get some creditors to accept "loans for equity" deals, so that the company might end up being worth something and could be sold to another company. By giving the creditors warrants, they have an incentive to try and negotiate some restructuring that gets the company back on its feet.
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