Reorganization bond

A bond issued by a company undergoing a reorganization process.

Reorganization Bond

A bond issued by a debtor in possession, which is a company that maintains its operations during a Chapter 11 bankruptcy. A debtor in possession is generally attempting to fulfill its reorganization plan, discharging certain debts and changing any structural weaknesses to put it on a path to profitability. A company often requires financing in order to restructure, and a reorganization bond enables it to do so. Because of the risk inherent to buying a bond issued by a debtor in possession, reorganization bonds carry a high interest rate.

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After a brief review of the balance sheet consequences of an asset collapse, I provide a summary of reorganization bonds, which are a market-oriented alternative resolution process that respects the property rights of creditors, preserves as much of the value of a failing firm as possible, and minimizes disruption to credit markets, asset markets, and the economy.

The firm remains as a going concern, maintaining both the core functions of the firm and all contractual obligations other than its long-term debt obligations to the holders of the reorganization bonds (which are replaced with equity).