Do you have examples of companies with positive margin and operating cashflow that went belly up because of outstanding debt?

I would think the debt holders would rather cut a deal than let the company go belly up. $.50 on the dollar is better than zero cents on the dollar.

General Motors. Several airlines. You’re describing bankruptcy protection. It means the debt holders will agree to pennies on the dollar or possibly even to forgive the debt but take over the equity wiping out the common shareholders. Companies can file for bankruptcy protection or debt holders can effectively force companies into bankruptcy if they default on their debt payments.

I’m not sure GM fits the bill. It looks like their operating cash flow was negative in 2008.(1)

[1] https://media.gm.com/media/us/en/gm/news.detail.html/content...

Let's be specific: chapter 11 (reorganization) and chapter 7 (liquidation) are completely different.

Maplin apparently had operating profits but accounting losses in the few years before it failed: http://www.coppolacomment.com/2018/03/the-sad-story-of-mapli...

As you can see, 15% interest rates will do that. But this is one of those weird PE setups where the left hand is lending to the right hand.

But aren't the debt holders typically the first ones to be paid in a bankruptcy?

Yeah true, I guess it wouldn't be a question of $.50 on the dollar vs nothing. Maybe extending the repayment period so that payments are lower but it increases the total financing costs?

It just seems to me that if a company is doing something profitably, that would be the company I would want to lend money to.

Or get your money out now in the first tranche and do something less risky with it? It’s not just the face they are profitable, it’s opportunity cost and risk also. If pulling out now screws everyone else involved,it’s not really their problem is it?

yes, but some of the posters here are being purposefully disingenuous.

When getting a mortgage, one of the things the companies will look at is your income to debt ratio. For a company it's no different. Yes, there have been companies that have gone under for too much debt. There have also been plenty of companies that have done well even with debt.

When you hear people say "OPM", aka "Other People's Money", what they typically mean is taking on debt and paying it down over time.

And for the poster who stated you don't have to service equity... that's completely bullcrap. We've all heard stories of VC's shuttering a profitable company because they weren't profitable ENOUGH. There's a cost to everything, that equity isn't free.

Don't forget about the dividends / interest usually associated with preferred shares. Those are constantly accruing and need to be paid out before any "gains" make their way to common shareholders.