(Bloomberg) — Investors are piling into stocks of bankrupt companies, wagering against a court process that routinely wipes out shareholders.Car renter Hertz Global Holdings Inc., oil driller Whiting Petroleum Corp. and retailer J.C. Penney Co. are among companies that have seen their shares more than double in recent trading sessions despite being in Chapter 11 bankruptcy, a process that allows companies to keep operating while working out a plan to repay creditors.“I have always thought people have a psychological urge to buy stocks at a low price,” said Kirk Ruddy, a former bankruptcy claims trader. Retail investors may be buying big names they recognize without realizing how rare it is for shareholders to get anything back in bankruptcy, he said.“If you look at the markets in general, people don’t know where to put their money. They are like ‘Hey, I’m going to try that $1 stock,”’ said Ruddy, who now works in sales for SC Lowy Financial HK Ltd.On Tuesday, J.C. Penney shareholders will press a federal judge to appoint a court-approved committee to represent them in the bankruptcy case. Getting official status would mean forcing the retailer to pay for lawyers and financial advisers who would work on behalf of shareholders. Judges rarely grant such requests for two reasons: The legal fees can be expensive and under the so-called absolute priority rule, all the debt of a company must be paid before shareholders can collect anything.Some of the rally in bankrupt shares might be attributable to short covering, when traders who have bet against a company close their positions by re-buying shares, lifting prices. But the rally could also be fueled by amateur traders, bored in lockdown and looking for a quick buck, using platforms such as Robinhood. The number of Robinhood users holding both Hertz and Whiting Petroleum shares surged after the companies filed for bankruptcy, according to Robintrack, a website unaffiliated with the stock trading platform that uses data to show trends.“No one ever loses equity in a bankruptcy case,” U.S. Bankruptcy Judge David Jones said during a status conference in the J.C. Penney case last month. “Equity gets lost long before the case is filed.”Under U.S. bankruptcy law, shareholders are last in line for any kind of payout — behind the lawyers, lenders, and vendors — making a recovery for shares unusual. The size and scope of payouts is usually determined by a so-called Chapter 11 plan, which creditors vote on and send to a federal judge for approval. Those plans often leave even high-ranking creditors getting less than they’re owed.The price hikes among the bankrupt include:Hertz, which climbed 95% since it filed bankruptcy on May 22J.C. Penney, up 167% since May 15Whiting Petroleum, up 835% since April 1Pier 1 Imports Inc. more than doubled in the last two trading sessions, though it’s still down 97% since filing for bankruptcy on Feb. 17Companies that have begun planning for bankruptcy also saw their shares surge Monday, including:Chesapeake Energy Corp. jumped 182%GNC Holdings Inc. rose 106%Representatives for Chesapeake, Hertz and Whiting did not reply to a request for comment. GNC and J.C. Penney declined to comment.Meanwhile, debt securities tied to the companies continue to trade below par, implying a less-than-full recovery for creditors who are ranked well ahead of shareholders.Whiting Petroleum does have a plan on file which calls for a payout to current stockholders in the form of new shares. But as with most everything in bankruptcy, the plan is subject to court approval and could face challenges from higher-ranking creditors.(Adds Pier 1 Imports)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

from Yahoo Finance https://ift.tt/3dLWwMi

(Bloomberg) — Chesapeake Energy Corp. is preparing a potential bankruptcy filing that could hand control of one of the leading lights of the U.S. shale revolution to senior lenders, according to people with knowledge of the matter.The dwindling options for a powerhouse that once rivaled Exxon Mobil Corp. for title of king of American natural gas comes after Chief Executive Officer Doug Lawler’s 7-year effort to untangle the financial and legal legacies of Chesapeake’s late founder, Aubrey McClendon.Lawler’s denouement, in turn, would signal the deep peril facing a shale industry largely built according to McClendon’s blueprint for Chesapeake: amassing incredible debts to pursue aggressive drilling programs that ultimately unearthed too little treasure to reward investors.Gordon Pennoyer, a spokesman for Chesapeake, declined to comment. The talks with lenders come almost seven years to the date that Lawler assumed the helm at the Oklahoma City-based company at the behest of Carl Icahn and O. Mason Hawkins, at the time two of the driller’s biggest investors.Chesapeake is negotiating a restructuring support agreement that could see holders of its so-called FILO term loan take a majority of the equity in bankruptcy, said the people, who asked not to be identified discussing confidential matters. The support agreement remains fluid and the terms could change, the people said.Chesapeake, which owes about $9 billion, is debating whether to skip interest payments due on June 15 and invoke a grace period while it talks with creditors, the people said. No final decision has been made. The company has also begun soliciting lenders to provide debtor-in-possession financing to fund its operations during bankruptcy, according to one of the people.Ripple EffectsA bankruptcy filing by Chesapeake would reverberate well beyond its investors and employees because it will put millions of dollars in pipeline, fracking and other contracts at risk.The stock, whose shrunken price was boosted by a 1-for-200 reverse stock split earlier this year, more than tripled at one point Monday to $84.75, then plunged to $52.05 after Bloomberg reported the potential Chapter 11 filing. A bankruptcy typically wipes out existing shareholders.Chesapeake, the brainchild of McClendon and co-founder Tom Ward, was one of the first to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil.That gamble provided trailblazers like Chesapeake, Continental Resources Inc. and EOG Resources Inc. a head start over industry titans like Exxon and Chevron Corp. in dominating the burgeoning shale sector. Years later, companies like Exxon would pay dearly to gain footholds in shale.Lawler’s efforts to rescue Chesapeake have included across-the-board belt-tightening at the company’s once-lavish corporate headquarters, along with tens of thousands of job cuts. A years-long campaign to transform the gas giant into an oil company never gained traction.Pre-CovidThe driller recorded $8.5 billion in impairments for the first three months of the year as the value of its fields, a sand mine and other assets plunged along with commodity prices.Chesapeake was already in a precarious position before the Covid-19 outbreak sent crude demand plummeting. At its height more than a decade ago, the producer was a $37.5 billion juggernaut commanded by McClendon, an outspoken advocate for the gas industry. But Chesapeake’s success at extracting the fuel from deeply buried rock contributed to a massive gas glut.Kirkland & Ellis and Rothschild & Co. are advising Chesapeake, according to people with knowledge of the matter. The FILO lenders are organized with Davis Polk & Wardwell and Perella Weinberg Partners LP, the people said. Franklin Resources Inc. is organized with Akin, Gump, Strauss, Hauer & Feld LLP, according to one of the people.Representatives for Rothschild, Perella Weinberg and Franklin declined to comment, while representatives for Kirkland & Ellis, Davis Polk, and Akin Gump didn’t immediately comment.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

from Yahoo Finance https://ift.tt/2AU4THe