Thread: Economics Strikes dont always work.
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Old 11-16-2012, 10:15 AM   #93
Amnorix Amnorix is offline
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Just for the sake of it, let me give you a very brief alternative scenario where the unions are basically right to do what they did. I have no idea if this is true or not, of course, but it's worth putting out there how complicated this stuff is.

To get the company out of bankruptcy, the former owners decide they're going to put in a significant amount of new money, but they want to structure it nearly all as debt, at a very high rate of interest -- 15%. On top of that they have senior secured debt form an institutional lender. The lender sees that the company is thinly capitalized so it requires quite alot of covenant protection and a higher-than-market rate of about 8% (which floats based on financial performance). This entire structure is very risky, because if the assumptions don't work, the company is pretty much bound to fail. If the new money had come in entirely (or even mostly) as equity, then the debt load would be much lower, interest rates would be much lower and the senior lender may have given more generous loan terms.

In connection with the exit, the union was required to give up rights that it had and convert some of that to equity. It wanted to have a portion of that as debt, pari passu with the senior secured, but they said (not unreasonably) "no new money from you so no debt status for you". The union accepted the deal, along with reduced benefits etc. going forward.

The new money put in by the owners is better protected because they are lenders, not equity holders, but they also helped caused the problem in the first place because there was ZERO margin for error.

Things don't work out, and the company goes back into bankruptcy. That's partly because (in my entirely hypothetical situation), they decided to expand product lines with insufficient market research, and try to penetrate new markets that were already saturated/dominated by competitors. A complete waste of effort and money.

And now the union is once again asked to make concessions so that the company can continue and the senior secured lenders (who otherwise will make a partial recovery at best) can be far more likely to make a full recovery. Union says no, we've taken it on the chin enough times. They've seen this play before, and have no confidence that this ownership group will be able to make the company viable.



All that is balanced against, of course, the workers losing their jobs. I have no idea what their other opportunities may be, so who knows if they were morons to do that or not. But the point is that the company was almost bound to fail under this ownership/leadership and they were no longer willing to keep taking reduced wages and reduced benefits to keep the company afloat.
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