There is theory, and then there is actual practice, and the chapter 11 case of USEC, which processes uranium for power plants, provides a nice reminder that the two are not always the same, according to a commentary in The New York Times on Friday by Stephen J. Lubben. Academics in both the business and legal worlds spend a lot of timing worrying about the absolute priority rule. They have long argued that failure to heed the absolute priority rule with great rigor results in higher debt costs for all borrowers in the economy. It’s the basis for many academic criticisms of chapter 11. But consider the USEC reorganization plan, which creditors and preferred shareholders have agreed to support. It would give the holders of existing convertible notes cash for their accrued but unpaid interest, as well as new notes and just more than 79 percent of the stock of the reorganized company. The preferred shareholders — Toshiba and Babcock & Wilcox — would receive little more than $40 million in notes and not quite 16 percent of the new equity. The old shareholders would retain a 5 percent interest in the company. All other claims would ride through bankruptcy unaffected.
