Ask Kim
Bonds After Bankruptcy
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
February 4, 2002
I recently inherited a $7,000 Bethlehem Steel bond. Since Beth Steel has filed for bankruptcy, is the bond now worthless?
The bond isn't worthless, at least not yet.
Under Chapter 11, a company keeps operating while trying to reorganize its business. The good news for bondholders is that they are fairly high on the food chain for repayment. As a result, the bankrupt company's bonds usually will retain at least some of their value.
"Some bonds will rebound by the end of the bankruptcy to almost face value, and others may end up being almost worthless," says George Putnam, editor of the Turnaround Letter, which follows troubled companies. "The price of its bonds will depend on people's outlook for the company's ability to reorganize successfully."
Bethlehem Steel bonds recently traded for about 10 cents to 15 cents on the dollar. The company's management and creditors (including those representing bondholders) are working on a reorganization plan, which ultimately must be approved by the bankruptcy court. In a typical plan, which can take years to hammer out, the reorganizing company exchanges old bonds for new bonds, stock or a combination of the two.
Whether to hold or dump the Bethlehem bonds is a tough call, says Putnam. "Some steel companies have emerged from bankruptcy with some real value," he says. But others have ended up liquidating, leaving bondholders with virtually nothing.