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Capital Structure and Bankruptcy

Accumyn represented one of the parties subject to federal government fines as a result of the Macondo oil spill.     One of the key issues in this proceeding was the probability that the client would either suffer a credit rating decrease or be forced into bankruptcy as a consequence of the proposed fines.   In support of the Accumyn’s testifying expert, Dan examined the client’s capital structure and determined that both downgrade and default were risks owing to the company’s peculiar debt structure.

In comparison to other companies in its industry, the Company’s balance sheet over levered. In addition the debt securities the company had recently issued contained provisions for an upward revision of the coupon rate for each level of debt down grade from the level when the bonds were issued.

As a result, a downgrade would have an immediate effect on cash flow to cover the cost of these bonds already outstanding.   This held the potential for a downward debt spiral into bankruptcy as the cost of capital rose at a time when the company’s business was suffering as a result of the shutdown in drilling in the Gulf of Mexico imposed following the disaster.

The case was subsequently resolved favorably for the client.