1. Economic/Value Destruction Default
Fundamental Principle: Present Value of Assets + Future Value Creation < Present Value of Obligations
A. Natural Business Entropy
Kodak (USA, 2012)
- Failed to adapt to digital photography revolution despite inventing first digital camera
- Core technology shift made traditional film business obsolete
- R&D investments in digital couldn’t offset rapid decline in traditional revenue
- Key Learning: Even market leaders succumb to technological entropy without constant innovation
Nokia (Finland, near-default 2013)
- Dominated mobile phone market but missed smartphone revolution
- Operating system became obsolete against iOS and Android
- Required Microsoft intervention to avoid bankruptcy
- Demonstrates how market leaders can fall due to technological entropy
B. Network Effect Deterioration
MoviePass (USA, 2020)
- Business model relied on network effects between theaters, subscribers, and studios
- Unsustainable pricing destroyed network value
- Theater chains developed competing services
- Shows how network-dependent businesses can collapse when key relationships fail
WeWork (USA, 2023)
- Network effect between property owners and tenants broke down
- COVID-19 accelerated remote work trends
- Occupancy rates couldn’t support debt burden
- Illustrates vulnerability of platform businesses to network disruption
C. Core Business Model Failure
Evergrande (China, 2021)
- Business model relied on continuous property price appreciation
- Leveraged land bank strategy failed when market turned
- Government policy changes exposed fundamental flaws
- Shows how regulatory changes can expose underlying business model weaknesses
Thomas Cook (UK, 2019)
- Traditional travel agency model disrupted by online booking
- High fixed costs (retail locations, airlines) became unsustainable
- Failed to adapt to changing consumer behavior
- Demonstrates how legacy business models can become unviable
2. Value Diversion Default (with Behavioral Dynamics)
Fundamental Principle: Economic Value Exists > Obligations, but Available Value < Obligations
A. Disclosed Diversions with Stakeholder Conflicts
Sears Holdings (USA, 2018)
- Eddie Lampert’s ESL Investments bought valuable assets
- Land sold to Seritage Growth Properties (related REIT)
- Valuable brands sold to separate entities
- Classic case of asset stripping through disclosed transactions
Toys “R” Us (USA, 2017)
- Leveraged buyout by private equity loaded company with debt
- High management fees and dividends to sponsors
- Illustrates conflict between PE owners and creditors
- Shows how disclosed financial engineering can lead to default
B. Hidden Diversions
Wirecard (Germany, 2020)
- Systematic fraud through fake transactions
- Missing €1.9 billion in supposed trust accounts
- Complex network of related party transactions
- Demonstrates sophisticated value diversion through fraud
Parmalat (Italy, 2003)
- €14 billion accounting fraud
- Fake bank accounts and complex corporate structure
- Shows how hidden diversions can operate for years
- Illustrates importance of corporate governance
C. Stakeholder Behavioral Conflicts
Noble Group (Singapore, 2018)
- Mark-to-market accounting manipulation
- Complex trading structures hid losses
- Creditor groups fought over remaining assets
- Shows conflicts between different creditor classes
Pacific Gas & Electric (USA, 2019)
- Conflict between public safety and shareholder returns
- Wildfire liabilities led to bankruptcy
- Different creditor classes competed for claims
- Illustrates complex stakeholder conflicts in regulated industries
3. Temporal/Liquidity Default (with Information Asymmetry)
Fundamental Principle: PV(Assets) > Obligations, but Liquid Assets < Current Obligations
A. Pure Timing Mismatch
IL&FS (India, 2018)
- Infrastructure assets with long payback periods
- Short-term financing of long-term projects
- Complex group structure complicated refinancing
- Classic asset-liability mismatch case
Bear Stearns (USA, 2008)
- Over-reliance on overnight repo funding
- Quality assets couldn’t be liquidated fast enough
- Market panic led to liquidity squeeze
- Shows how timing mismatches can bring down even solvent institutions
B. Information Asymmetry Effects
Lehman Brothers (USA, 2008)
- Market lost confidence in asset valuations
- Repo 105 transactions masked true leverage
- Counterparties withdrew funding
- Shows how information problems accelerate liquidity crises
Yes Bank (India, 2020)
- Hidden bad loans created uncertainty
- Depositor panic led to bank run
- Required government intervention
- Demonstrates how information asymmetry triggers liquidity crises
Key Cross-Cutting Themes
- Multiple Principles Often Combine
- Most major defaults involve elements of all three principles
- Information asymmetry often triggers liquidity issues
- Value diversion can accelerate economic value destruction
- Industry-Specific Patterns
- Financial institutions more vulnerable to liquidity/information issues
- Industrial companies more prone to value destruction
- Real estate firms often face all three types
- Geographic Variations
- Developed markets: More sophisticated value diversion
- Emerging markets: More direct economic value destruction
- Information asymmetry universal but manifests differently
- Regulatory Environment Impact
- Strong governance reduces value diversion risk
- Disclosure requirements affect information asymmetry
- Banking regulations focus on liquidity risk
- Early Warning Indicators
- Complex corporate structures suggest potential value diversion
- Rapid industry change signals value destruction risk
- Funding structure complexity indicates temporal risk
