Bankruptcy--Casey and Macey on Hertz and Absolute Priority

• "The Hertz Maneuver (and the Limits of Bankruptcy Law)" University of Chicago Law Review Online (2020). Casey and Macey on the Hertz stock issue during bankruptcy.

They argue that (a) it is good for firms to be able to issue equity during bankruptcy, and (b) absolute priority is worse for maximizing value during bankruptcy than giving shareholders some fraction of the value of the firm.

They are obviously right on (a), but their reasoning on (b) seems fallacious. A lot has been written on absolute priority. I'd need to sort it out. But the senior bondholders do get the proceeds from selling the firm. If they can be made whole, there is an efficiency problem, because they don't care about anything beyond that, but if they can't, then they are residual claimants.

Suppose there are just shareholders and senior bondholders, who are owed $100 million by a firm that has assets with a current liquidation value of $90 million. The bondholders would be willing to sell the firm for $101 million even if they could get $120 million for it, and if a $101 million offer came by, they'd snap it up rather than wait for better.

Suppose, though, that the best offer is $95 million, but they could wait for a $97 million offer. They would wait.

The only problem is if the $95 million offer might disappear in between.

But actually what needs to be sorted out is liquidation versus sale as a going concern. If it is liquidation that will happen, we don't need to worry about investment decisions, do we? If it is sale as a going concern, then we shouldn't need to worry about offers disappearing. The better the bondholders run the firm, the higher the value they'll get when they sell it. Again, it is only if bonds are trading at par rather than a discount that we need to worry about them making bad decisions. I might just be confused though.