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In finance textbooks, when a company defaults on its bond, the investor in the bond simply does not receive its money or recover only a certain percentage. But what happens in reality? Shouldn't the company still be liable to reimburse the investor the investor in totality?

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This depends on whether or not the bond holders think that the company is -- or can be made to be -- a going concern.

The company could:

  1. renegotiate the loans,
  2. go into bankruptcy (liquidation, reorganization, etc)
  3. pay the bond holders what cash it has,
  4. sell parts of itself to other companies.

The major bond holders will be in on this, talking with the banks and -- if they think the company can be salvaged -- possibly forcing a change in the CEO, CFO, COB, etc.

  • 2
    However, if – at the end of the day – there isn't enough money to pay all bond-holders (who will, at least, be ahead of stock-holders in the queue to be paid) then "no", the company will not be liable (or, at least, able) to reimburse the bond-holder. The "limited liability" nature of companies (Inc., Ltd.,, plc., etc. depending on country) means that no one else will be liable for the debt either. This increased risk is what you accept for the (potentially) higher payback of bonds (compared to a simple savings account). – TripeHound Jul 9 '19 at 7:12
  • Yes, but that happens then through a liquidator as the company is actually legally obliged to declare itself as bankrupt if negotiations fail. As such, it is mentioned aboce as item 2. – TomTom Jul 9 '19 at 8:02
  • @TomTom But it seems to be the ramifications of item 2 that the OP didn't fully appreciate ("Shouldn't the company still be liable to reimburse the investor in totality"), which is why I thought it helpful to spell it out in a little more detail. – TripeHound Jul 9 '19 at 15:05
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The company is bankrupt.

If they can't pay back the bond they're bankrupt and you likely don't see a whole lot of your money again (especially soon). There are a lot of costs associated with bankruptcy which eat a lot of the money that could be paid back. The company will likely hope for a restructure/sale of the company which would (eventually) lead to you getting paid.

If they won't pay back the bond, they'll be bankrupt soon because no one will give them any money and the legal issues of that decision will be quite costly.

So yes, if they default you probably will get pennies on the dollar years down the line.

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