On the eve of the sixth anniversary of Owens Corning's bankruptcy filing yesterday, investors continued to flock to its stock.
The price rose 8 cents to 96 cents on the over-the-counter bulletin board as 1.1 million shares exchanged hands.
Yet many stockholders are perplexed about why the shares continue to attract so many buyers given that they are due to be canceled and replaced with new stock when the firm exits bankruptcy - likely by Oct. 31.
The Toledo manufacturer of building materials and fiber- glass filed for Chapter 11 protection Oct. 5, 2000, to escape multibillion-dollar asbestos liability.
An OC spokesman declined to discuss possible reasons for the stock's price.
"The market determines the price of our securities like every other company," said Jason Saragian. "We are unable to speculate on what drives the price."
But experts say the answer rests in a combination of factors, including the often unpredictable movement of the stock market, speculation, and a last-minute deal negotiated by lawyers to wring some value for stockholders out of the $8.6 billion arrangement for the firm to exit bankruptcy.
In many Chapter 11 bankruptcies that include cancellation of existing stock, old shares continue to attract buyers until the last day, said Wall Street analyst Stephen Vlahos, who specializes in the debt of troubled firms.
"It's very irrational exuberance," he said.
OC's 55 million shares are slightly different, he noted.
As part of a deal negotiated by lawyers for existing stockholders, they will receive warrants or rights to purchase new stock at the preset price of $45.25 a share for seven years.
Financial advisers expect OC's new shares to initially trade at $30 on the New York Stock Exchange.
If they rise above $45.25 between opening of trading and 2013, owners can buy shares at the lower price, sell them, and then pocket the difference.
Still, the exchange of shares won't be one-for-one. Stockholders will get the right to buy one share of new stock for about seven shares of old stock.
But a lot of investors are willing to roll the dice on a firm fresh out of bankruptcy, said Mr. Vlahos of Bishop, Rosen & Co. Inc. New York.
"When companies come out of bankruptcy, they come out lean, mean, and tough," Mr. Vlahos said. "All of their past sins have been taken care of. They typically have strong sales and profit." (OC made $251 million on $1.7 billion in sales in the second quarter.)
It is likely, he said, that the warrants OC issues could one day have value. But he doesn't recommend current shares.
"If the stock goes up, you'll get a pop on the warrant," Mr. Vlahos said. "But the stock isn't going to open at $30 and trade at $45 the next day. You'll have plenty of time to think about it and do your homework. It might be smarter to buy new stock when it comes out."
There is a scenario under which existing shares will have even greater value.
If the U.S. House and Senate by January pass asbestos relief legislation - a development now considered unlikely by congressional watchers - existing shareholders would receive 19 million shares of the new stock, or about 15 percent of the total.
Misplaced optimism over asbestos relief legislation sent OC shares to nearly $6 at one point during the bankruptcy case.
And OC Chief Executive Dave Brown apparently doesn't have high hopes for existing shares. He sold his remaining 9,900 shares for 90 cents a share on Aug. 29, according to a filing with the U.S. Securities and Exchange Commission.
But the phenomenon occurring in the OC bankruptcy is nothing new.
In a 1997 article in the Quarterly Review of Economics & Finance, a pair of university researchers found that it is common for shares of bankrupt companies to trade at comparatively lofty levels.
"We showed that, in retrospect, investors grossly overpaid for what would be received from bankrupt companies," wrote Jeff Hubbard and Kevin Stephenson.
"About a quarter of the firms filed reorganization plans which gave nothing to shareholders. Although none of these firms ultimately gave anything to the shareholders, the stock of roughly one-third of these companies continued to be actively traded after the plans were filed, at prices that appear to be irrational."
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