Distressed Credit Overview - Valuation questions

[samuel.luk@gmail.com]

1. Slide 29
a. Where do bank vs bonds fall in this cap structure diagram (unclear)
b. Senior debt
i. Even though it has a 1st or 2nd lien on assets, is it always considered “unsecured” and not “secured”? why – is it because Senior Secured Debt is typically
placed in SPV vehicles?
ii. Does this category include bank debt only (eg, 1st and 2nd lien term loans, etc), not including bonds

2. Slide 34
a. Under Distressed Value boxes, if TEV = 300, shouldn’t the entire 300 go to pay the Senior Debt outstanding since it has seniority over Sub Debt (shouldn’t Senior Debt
be paid in full before moving on to the next claimant)? Why is the 300 TEV split 250 to Senior Debt and 50 to Sub debt?

3. Slide 36
a. try to tie to slide 29 – please help me place the 5 capital structure security categories from slide 29 into slide 36 buckets (where does it fall under Secured Bank
Claims, Secured Asset Financing, Bondholders, etc)
b. Why is Secured Bank Claims senior to “business operations” like Secured Asset Financing and Trade Claims, but Bondholders and Equity subordinate to these
“business operations”

[wsthost]

1) Capital Structure
a) Bank debt usually falls on the top box, Senior Debt (Revolver and Term Loans)
b) Senior Debt can be secured OR unsecured. Nothing to do with SPV at all.
Correct, Senior Debt usually does include bank debt and not usually bonds, especially the way we are listing it here.

2) Valuation
a) In a pure liquidation, correct. However, as the videos stated (or should have stated), the market is discounting the Senior Debt since the company is distressed and there is still value to the Subordinated Debt AND the Sub Debt is presumably receiving interest payments, so there's still value to the Sub Debt.

3) Liquidation
slide 29 category = slide 36 category
a) Senior Secured Debt = Secured Bank
b) Senior Debt/Bank Debt = Secured Bank
c) Unsecured Debt = Bond Claims
d) Subordinated Debt = Bond Claims
e) Mezzanine/Pref/Equity = Bond Claims / Old Equity

b) that's the case precedence set by US bankruptcy cases. if you think about it though, it *sorta* makes sense.
Bank Debt = specific contract that has been entered into whereas
Trade Claims are more like a promise to pay
Secured Assets (per the slide) are usually cured and re-instated back to pre-petition status, so other than annoyance factor, *mostly* made whole (other than expectations like executory contracts, as discussed in slides/videos)

[samuel.luk@gmail.com]

Thanks.

Further clarification on 1 (a) and (b):

1- So to clarify, the Green box can include secured and unsecured debt? What classifies a piece of debt in the Blue box (Senior Secured Debt) and not the Green Box (Senior Debt) – can you give an example please? Are securitizations excluded from this slide's capital structure?

2- Two examples that make the differentiation confusing to me:
1. Asset-backed revolvers – fall under which category? If asset-backed revolvers are secured by specific assets, would it be in the Blue Box? But since it’s a bank revolver, would that put it in the Green box?
2. 1st / 2nd lien loans – since it’s not secured by any specific asset but is a general 1st or 2nd lien against all company assets, this would be in the Green Box?


3- Question on slide 46 – trying to understanding bullet point 1, 4, and 6 together since it sounds confusing to me. As I understand it: only one class needs to accept a plan for it to be passed on to the court. Court can then confirm the plan. If confirmed by the court, under that specific plan, all impaired classes that are entitled to vote (meaning, they would receive at least some recovery value under that plan) MUST accept the plan for it to be implemented, while, other impaired classes (that would receive no recovery under that plan) don’t need to vote at all (ie their vote doesn’t matter for the plan to be implemented). Is that a correct understanding?

[wsthost]

1) You're overthinking it. Most of these will be clarified by reading the covenants in the credit agreements of each. It is impossible to place a generalizing bucket explanation since each debt is different. This is covered extensively in our Credit Agreements & Covenants course (not yet online unfortunately)

2a) Asset-backed revolvers are usually still revolvers. Many revolvers are backed by inventory and A/R and thus, get paid first.
2b) First and Second Lien are usually referring to bank debt. Bank Debt are secured by the PPE, etc. Corporate bonds are usually debentures (backed by the good faith & name of the company)

3) Yes and no. In Lyondell's case (briefly covered in the videos) there was no alternative plan and the only one that made it was the one in which many/most impaired classes voted no but was "crammed down" (Forced) to take the plan because it still represented the best deal around. but one class voted yes which was the ones that got to "roll-up" their pre-petition debt as part of the new DIP.

The impaired classes that receive ZERO recovery under that plan are deemed to automatically vote AGAINST that plan, hence no point for them to vote.
Not all impaired classes have to vote YES (look at Lyondell's case again); if accepted anyway (with AT LEAST ONE impaired class voting YES), then they have been crammed down.

[samuel.luk@gmail.com]

thanks for the clarification!