The Bull's Pen

When calculating recoveries in a liquidation: EV of company exceed the face value of debt: senior creditors paid first If most senior class of creditors is unimpaired, junior creditors will be paid If most senior class of creditors is impaired, junior creditors will not receive anything DEF Pari Passu: both securities are on an equal footing in the capital structure (same seniority) HoldCo/OpCo Structure: HoldCo: company that holds equity in operating companies OpCo: operating subsidiaries where the assets themselves typically reside Reasons for HoldCo/OpCo Structure: For large companies that sell products around the world, it can be efficient to have country-specific operating subsidiaries for regulatory, tax, and accounting purposes By having a HoldCo, we have another area to raise debt. Debt issued at HoldCo tends to be the yielding debt as it's removed from where assets reside Structural subordination: debt at OpCo level is closer to assets of the company and will be made whole

Recap : In the last post, we covered capital structures and some basic terminology Absolute Priority Principle: in a distressed/bankrupt situation, a company's capital structure determines the order of claims on a company's assets. This order is:  Secured Debt Unsecured Debt Subordinated Debt Mezzanine Debt Equity Bonds vs. Loans: Bonds: source of funding that can be obtained from the public and usually have a par value of $1000 Loans: obtained through bank, more restrictive covenants and not as liquid as bonds Types of secured (senior) debt: Revolver: Secured, 1st lien Corporate credit card Floating interest (LIBOR+spread) Term Loan A: Secured, 1st lien 5 Year Term Amortizing - payment schedule over time Term Loan B: May be 2nd or 1st lien 5-8 Year Term No amortization - bullet maturity (lump sum in the end) Types of unsecured (junior) debt: Mezzanine: Mix of debt and equity, e.g. convertible debt, convertible preferred stock PiK interest Reasons for Financial Distress: Bad ma

Background: For most bankruptcies, you won't even know it's happening as it's happening In a sophisticated financial system, bankruptcy should not equal the end of the business because c ompanies are generally worth more alive than dead. Instead, business is transferred from equity shareholders to the lenders Restructuring: process where a new capital structure is determined Restructuring Investment Bankers work with distressed companies and/or stakeholders to help them with M&A, financing, and restructuring negotiations Basic Problem of Restructuring: Basic Problem: a firm's financial value (assets value) is less than its debt component Basic Question: what is the firm worth?  In a bankruptcy scenario, equity is worth however much we think it's worth Some distressed companies could be worth a lot but are just facing temporary debt issues There are 2 sides in restructuring and distressed situations: Debtors: companies, borrowers of debt Creditors: different grou