“Roaches check in, but they don’t check out” is an apt analogy for many equity investments in financially distressed companies. These owners typically cannot take distributions due to restrictions in credit agreements. Cash that was previously ‘checked in’ to the business cannot be ‘checked out.’
“You can check out any time you like, but you can never leave” is also a suitable comparison for several equity investments in financially distressed companies. These owners can sometimes take distributions. However, the money has to be returned if the company subsequently files for bankruptcy and a court holds that the distribution was a fraudulent transfer. The money can (effectively) never leave the company when this happens.
These observations have interesting implications for valuing pass-through entities that are, or may become, financially distressed.
