Game Over for LINE Stock?
Linn Energy LLC (NASDAQ:LINE) filed for bankruptcy Wednesday, sending shares of LINE stock plunging more than 57% in early Thursday trading.
Over the past year, Linn Energy has been crushed under the weight of weak oil prices and a heavy debt load. On Wednesday night, the story reached its logical conclusion. Linn Energy LLC filed for chapter 11 bankruptcy after striking a deal with lenders to restructure its debt load and obtain fresh financing. (Source: “Linn Energy, LinnCo and Berry Petroleum Enter Restructuring Support Agreement With First Lien Lenders,” Linn Energy LLC Investor Relations, May 11, 2016.)
In a press release to investors, management said the holders of more than 66% of its credit facility have agreed to the “broad terms” of a debt restructuring but didn’t elaborate further. Lenders have also agreed to let Linn Energy spend the cash securing its debt and to help fund a new $2.2-billion term loan. The move will allow Linn Energy to continue normal operations without lining up new bankruptcy financing. (Source: Ibid.)
Investors were disappointed with the decision. Following the announcement, shares of LINE stock plunged 57% in pre-market trading. Units of partner LinnCo LLC (NASDAQ:LNCO) dropped more than 55% before the opening bell on Thursday.
Chapter 11 bankruptcy could be thought of as corporate open-heart surgery. Rather than selling off all assets to pay back creditors, the firm will attempt to change the terms on loans with creditors. This could include changing the interest rate on outstanding loans or the dollar value of payments.
A trustee is then appointed to supervise the transition and the business is allowed to continue operating. Note, chapter 11 does not absolve borrowers of their debts. The restructuring only changes the terms of the loans, which must be paid back through future earnings.
If successful, a company can emerge from chapter 11 bankruptcy as a profitable, functioning business. General Motors Company is a classic example. If negotiations with creditors are not successful, the company can file for chapter 7 bankruptcy. This involves selling off assets piece by piece to pay off creditors and close down the business.
Regardless of which option is chosen, common shareholders of LINE stock will most likely see their investment completely wiped out.