QualTek (NASDAQ: QTEK) stock is up 195% this morning which, for a company in Chapter 11 bankruptcy is one of those things that we generally do not expect to happen. For it is true that some companies have emerged from Chapter 11 with value still remaining for that earlier equity. But far, far, more common is that the equity gets wiped out. So, what's the thing that everyone thinks will happen here to make QTEK any different from any run of the mill bankruptcy?
The answer being that there's really not anything here to support such hopes. QTEK has a number of problems but the biggest was that the IPO via a SPAC really didn't work out all that well. Far too many of the original unit holders regained their money and took it home. Thus QualTek didn't raise the capital it thought it would, didn't raise as much as it needed. This meant taking on debt at just the time the Feds started to raise interest rates. That debt burden, the coupon on it, is too high and is cutting into the business' ability to finance ongoing work. So, Chapter 11 to reduce that debt burden.
QualTek stock price from NASDAQ
To an extent the Chapter 11 filing was a pre-pack. “pre-pack, QualTek said, “The Debtors anticipate that the Plan will enjoy the overwhelming support of its creditors, eliminates approximately $312 million of the Company's funded debt, leaves trade creditors unimpaired, and provides the Company with $65 million in additional liquidity through viable and adequate DIP and exit financing commitments.”
Note that there's no mention there of recovery for the equity. “Company anticipates plan of reorganization support from at least 85% of secured debt holders and 80% of convertible note holders” Note that the equity doesn't even get mentioned there.
Think of this another way. $300 million and change of debt is going to get written off. OK, so that's a certain amount of pain for creditors, sure. In return they can ask for all the equity in the company. There's only a return to equity is the assets are worth more than the debts, which doesn't seem to be the case. So, why would the creditors allow old equity to capture some of the value when the creditors don't have to do that?
An entirely reasonable assumption is that QualTek equity is going to go to zero. So, why are people speculating in it to drive it up near 200% this morning?