One thing I love about America is how transparent everything is. Unlike many other places in the world, the U.S. makes information accessible, and that's a big part of why American capital markets thrive while others lag behind. This transparency is especially evident when companies go through bankruptcy. To many, bankruptcy sounds like the end of the road, but to a savvy investor, it can be the start of a new chapter. The information is all there if you’re willing to read it. And, in the world of distressed investing, disclosure statements are where those details are often buried.

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What Are Disclosure Statements?

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When a company files for Chapter 11 bankruptcy, it’s required to produce a disclosure statement. This document provides essential information about the company’s restructuring plan, including how it plans to pay creditors, the future business model, and financial projections. It’s like a map that shows you how the company intends to find its way back to profitability. If you know how to read these statements, they can provide valuable insights into whether a company has the potential to thrive once it emerges from bankruptcy.

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One example that comes to mind is Peabody Energy, the largest private-sector coal company in the world. Peabody filed for Chapter 11 in 2016 after struggling under a massive debt load and a declining coal market. During their bankruptcy proceedings, they issued a detailed disclosure statement that outlined how they planned to restructure their debt, cut costs, and refocus on their most profitable operations. The statement also included financial projections for the next few years, showing how they intended to generate positive cash flow and reduce leverage.

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For investors willing to sift through the details, Peabody’s disclosure statement was a goldmine of information. It provided a clear picture of the company’s future direction, the steps management was taking to ensure profitability, and the financial health of the company post-bankruptcy. By the time Peabody emerged from bankruptcy in 2017, the company had significantly reduced its debt and was in a much stronger position to capitalize on a recovering coal market. Investors who had analyzed the disclosure statement and believed in the company’s restructuring plan were well rewarded as Peabody’s stock price rebounded.

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Key Insights from Disclosure Statements

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• Management’s Projections: One of the most valuable pieces of information in a disclosure statement is management’s financial projections. These projections provide insight into how the company expects to perform post-bankruptcy. Are they forecasting revenue growth? Are they projecting positive cash flow? It’s important to assess whether these projections are realistic or overly optimistic. When I looked at Peabody’s projections, I compared them to industry benchmarks and past performance to gauge their feasibility. If management’s numbers make sense, it’s a positive sign that the company has a viable path forward.

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• Debt Restructuring Details: Disclosure statements also provide information on how the company plans to restructure its debt. This can include details about new financing, debt-for-equity swaps, or agreements with creditors to reduce interest payments. Understanding the new debt structure is crucial because it tells you whether the company will have the financial flexibility to grow after emerging from bankruptcy. In Peabody’s case, the company managed to cut billions in debt, which significantly lowered their interest expenses and improved their cash flow outlook.

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• Business Strategy and Operational Changes: A good disclosure statement will outline the company’s business strategy and any operational changes they plan to make. This could mean selling off non-core assets, focusing on a particular product line, or reducing overhead costs. When I evaluate a disclosure statement, I want to see a clear and logical plan for how the company will generate profits moving forward. In Peabody’s case, they planned to focus on their most profitable mines and cut costs in less productive areas. This type of focus is often a good indicator that management is serious about turning the company around.

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Another Example: Caesar’s Entertainment

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Another interesting case is Caesar’s Entertainment, which filed for Chapter 11 bankruptcy in 2015. The casino giant had been burdened with debt following a leveraged buyout in 2008, and by 2015, they could no longer keep up with interest payments. Caesar’s disclosure statement provided a detailed look at how they planned to restructure, including debt reductions and a new focus on core properties in Las Vegas.

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One of the most intriguing aspects of Caesar’s disclosure statement was the debt-for-equity swap they negotiated with their creditors. By converting a large portion of their debt into equity, Caesar’s was able to significantly reduce its interest burden, freeing up cash flow to reinvest in their most profitable properties. The disclosure statement also included financial projections that showed steady growth in cash flow as the company focused on its core assets. By the time Caesar’s emerged from bankruptcy in 2017, they were well-positioned for growth, and investors who had studied the disclosure statement and believed in the restructuring plan saw substantial gains.

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How to Use Disclosure Statements to Your Advantage

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• Compare Projections to Industry Benchmarks: When analyzing a disclosure statement, always compare management’s projections to industry standards. Are their revenue and growth expectations in line with the broader market? If they’re projecting aggressive growth while the industry is stagnant, that’s a red flag.

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• Assess Debt Sustainability: Pay close attention to the restructured debt load. Will the company be able to manage its interest payments and still have enough left over to invest in growth? A good restructuring plan will leave the company with a sustainable debt level that doesn’t hinder its ability to compete.

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• Look for Stakeholder Alignment: The best restructuring plans have stakeholder alignment—where creditors, management, and other stakeholders are on the same page. If major creditors are agreeing to a debt-for-equity swap, it’s a sign they believe in the company’s future prospects. This kind of alignment can be a strong indicator that the restructuring will succeed.

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Final Thoughts

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Disclosure statements are often overlooked by investors who see bankruptcy as the end of the road. But for those willing to do the work, these documents can provide a roadmap to significant returns. They contain valuable insights into management’s plans, financial projections, and the company’s new capital structure. Whether it’s Peabody Energy, Caesar’s Entertainment, or any other company emerging from bankruptcy, the disclosure statement is your guide to understanding whether a company is worth investing in as it starts a new chapter.

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As my mentor once told me, “The information is all there if you’re willing to read it.” So, the next time you hear about a company going through bankruptcy, don’t just turn away. Instead, take a closer look—you might just find an opportunity where others see only chaos.