Arnold writes

Once upon a time, everyone worked for the MyTeaEst corporation, which produced one million loaves of bread in the year 2000. It paid its workers in bread, and they ate the one million loaves.

MyTeaEst also gave half of its workers a pension plan, promising them one million loaves of bread in 2025. It gave the other workers a 401(K) plan, where the workers deposited bonds issued by MyTeaEst that promised one million loaves of bread in 2025.

The year 2025 came. MyTeaEst still produced one million loaves of bread, with a new generation of workers. Those workers expected to be paid, in the aggregate one million loaves of bread. The older generation of workers on the pension plan expected one million loaves. And the older generation of workers with the 401(K) plan expected that their bonds would be repaid.

What do you suppose happened?

In 2001 analysts note that MTE has not increased capacity over last year and has no plans to do so. Cannot be considered a growth stock. Given its  lack of earnings the stock price collapses and MTE is shifted to the pink sheets.

With equity trading on the pennies the bond fund manager sees the writing on the wall and begins to buy up MTE stock.  For fun we’ll also speculate that MTE has a unionized pension plan. The Union sees what the bond holders are doing and starts a proxy battle for MTE

The two have an equal financial stake in MTE. However, the union also has strike power, which lowers the bond holders willingness-to-pay.

Bondholders sell out or otherwise concede to the Union. MTE becomes Union owned. At this point the Union creates MTE-U and signs a pension contract making it MTE-U’s senior creditor. MTE-U then acquires MTE’s assets in exchange for MTE-U debt.

2025 comes. MTE-U defaults on its obligations to MTE. This leads MTE to default to its bond holders. The bondholders take possession of MTE and its MTE-U bonds. MTE-U then defaults. However, its pension holders are senior.  They take the assets of the company and divide them amongst themselves.

The new crop of workers is fired and the original bond holders get nothing.