TWA: The Second Bankruptcy

In May 1995, about nineteen months after emerging from the Chapter 11 bankruptcy it filed in 1993, Trans World Airlines issued a Proxy Statement to seek the consent of its shareholders and certain creditors for another debt restructuring plan. The prospectus contained two plans of financial organization: one for an out-of-court restructuring, and the other for a “prepackaged” Chapter 11 bankruptcy. The exchange offers in the two plans were virtually identical, but the prepackaged restructuring plan required a lower acceptance rate. Under the plan, the creditors of TWA would forgive a substantial amount of the company’s debt in exchange for stock, other equity instruments, and revised terms on remaining debt. The creditors would own about 70% of the reorganized company and the common shareholders, mostly employees, would see their stake in the airline to shrink to about 30% from 45%. Adam Chandler, a holder of TWA’s 8% secured notes, read the proxy with interest. He needed to decide how to cast his vote — for or against the troubled carrier’s reorganization proposals. Was TWA worth more as a going concern than it would be if its assets were liquidated? What were its assets really worth? Would the company’s performance match management’s projections? Would TWA’s financial results be sufficient to support an increased equity valuation post bankruptcy, or should he try to thwart the deal in the hopes of obtaining a larger debt component to his restructured claim?