RX: Recoveries

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 before debt at HoldCo level

Upstream Guarantee: HoldCo lenders are assured that even though their debt resides at the HoldCo level, they ae effectively part of the OpCo capital structure where assets actually reside

Springing Maturity: if by a certain date a loan/bond lower in the capital structure has not been mostly refinanced, then some loan/bond higher in the capital structure will have its maturity date spring forward
  • more senior pieces of the capital structure want to ensure that a situation doesn't arise where some junior piece of the capital structure gets paid out, using up all or most of the liquidity of the company, leaving less for the more senior piece
Grid Pricing: revolvers will sometimes have grid pricing. E.g. revolver could have L+250 - 350 where L+250 is the rate if only X% of the revolver is drawn, but if more than X% is drawn then it goes up by L+350

Liquidation valuation: going through assets and assigning certain level of expected recovery from them if liquidated

Plan of Reorganization: 
POR must include 5 mandatory provisions according to section 1123
  1. Plan must designate classes of claims and classes of interest (e.g. must provide detailed cap structure)
  2. Plan must specify any class of claims or interest that are not impaired under the plan (e.g. classes that have full asset coverage thus will not be able to vote)
  3. Plan must specify treatment of any class of claims or interest that are impaired under the plan (e.g. what are you offering them in the reorganized company upon emergence from bankruptcy since they are impaired)
  4. Plan must provide same treatment for each claim or interest of particular class unless by requisite vote holders agree to a less favorable treatment
  5. Plan must provide adequate means for the implementation of the plan (meaning, the plan must be feasible and achievable)
Fulcrum security: one that likely receives lots of equity in reorganization. The most senior class of debt is impaired and not paid in full.  

Section 363 asset sale: buyer purchases asset free of all liens and claims with little or no risk of the transaction being subsequently unwound. Mgmt also keeps control of process unlike Chapter 7

Priming: when a new piece of capital structure is added to above existing pieces


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