from cfa text: in the case of reorganization, the absolute priority rule rarely holds. that is, an unsecured creditor may receive distributions for the entire amount of his or her claim and common stockholders may receive something, while a secured creditor may receive only a portion of its claim. The reason is that a reorganization requires approval of all the parties. Consequently, secured creditors are willing to negotiate with both unsecured creditors and stockholders in order to obtain approval of the plan of reorganization. my question is since secured creditors only receive a portion of their claim, why they want get appoval of reorganization?
if a company files for reorg, the absolutely priority rule doesnt hold. Because with the hope of a reorg, secured creditors increase their chances of recoverying everything, as opposed to just a portion which they’d get if they didn’t allow reorg to get approved.
Disclaimer: below is how the real world works, not sure if that’s what the CFAI wants you to know for June 6th. You two are talking about the differences between a “prepack” (prepackaged bankruptcy) and an actual bankruptcy filing. In an actual (unplanned, spontaneous, etc.) bankruptcy filing, the creditors receive their claims based on priority (through bankruptcy court), and the senior part of the capital structure (loans and/or secured bonds) must be paid in full before anyone else gets a red cent (in theory, because with lawyers you generally need to give others a couple of dimes so they promise not to sue). In a prepackaged bankruptcy, creditors meet beforehand and “divvy up” the company BEFORE the Chapter 11 filing, although I’ve never, ever, ever, ever heard of an unsecured bond recovering more than a secured bond, nor could I think of any bizarrely wild and off the wall scenario where this could ever happen. I work in the top of the capital structure (leveraged loans), and NOBODY gets a dime before I’m paid in full; it just wouldn’t ever happen - that’s why being “secured” is so much better than being “unsecured”.
work in distressed debt/equity pepp?
Like pepp sys, it’s up to the bankruptcy judge to look at the situation and decide whether the secured ones will get enough or not, and thus may decide to throw some cash at the unsecured guys first.
Huh? I really don’t know what the CFA text says about this (and don’t plan on reading it), but are you guys sure that you’re interpreting that correctly? Because from a real-world point of view, that’s 100% the opposite of what happens…
in bankruptcy, the judge would give everything to secured guys first before giving a dime to unsecured. however, to precisely avoid that, the company might do reorg and the secured creditors don’t have a say then. they have to simply negotiate for the best. again remember reorg approved means going concern again! so secured credits still have all the rigths firs tto their money in the event of bankruptcy situation yet again.
this make sense, i think cfa text made a mistake here. skillionaire Wrote: ------------------------------------------------------- > Disclaimer: below is how the real world works, not > sure if that’s what the CFAI wants you to know for > June 6th. > > You two are talking about the differences between > a “prepack” (prepackaged bankruptcy) and an actual > bankruptcy filing. > > In an actual (unplanned, spontaneous, etc.) > bankruptcy filing, the creditors receive their > claims based on priority (through bankruptcy > court), and the senior part of the capital > structure (loans and/or secured bonds) must be > paid in full before anyone else gets a red cent > (in theory, because with lawyers you generally > need to give others a couple of dimes so they > promise not to sue). > > In a prepackaged bankruptcy, creditors meet > beforehand and “divvy up” the company BEFORE the > Chapter 11 filing, although I’ve never, ever, > ever, ever heard of an unsecured bond recovering > more than a secured bond, nor could I think of any > bizarrely wild and off the wall scenario where > this could ever happen. > > I work in the top of the capital structure > (leveraged loans), and NOBODY gets a dime before > I’m paid in full; it just wouldn’t ever happen - > that’s why being “secured” is so much better than > being “unsecured”.
pepp Wrote: ------------------------------------------------------- > in bankruptcy, the judge would give everything to > secured guys first before giving a dime to > unsecured. > > however, to precisely avoid that, the company > might do reorg and the secured creditors don’t > have a say then. they have to simply negotiate for > the best. yes, but any senior secured lender would have the borrower trip covenants way before they decide to a reorg…plus most legal docs require 100% lender consent for any material changes to the company’s legal and business organization / structure…
100% correct about the bankruptcy court, although the second part is incorrect - me, as a secured lender, certainly has a say in everything that happens with the company and whether or not I’m happy with the prepack. If I don’t like the prepack, I just wait for the first missed interest payment or covenant violation, and then as soon as the grace period has passed, they need to legally give me and the rest of the first lien creditor group the “keys to the front door”, i.e., the company is ours. However, the company can still file their prepack that they want to, which just means I need to call my lawyer and waste some money putting his kids through college while he gets me what’s mine. Generally easier to negotiate a bit because going to court licks balls, but there’s no prepack getting done without the consent of the first-lien lenders.
skillionaire Wrote: ------------------------------------------------------- > Disclaimer: below is how the real world works, not > sure if that’s what the CFAI wants you to know for > June 6th. > > You two are talking about the differences between > a “prepack” (prepackaged bankruptcy) and an actual > bankruptcy filing. > > In an actual (unplanned, spontaneous, etc.) > bankruptcy filing, the creditors receive their > claims based on priority (through bankruptcy > court), and the senior part of the capital > structure (loans and/or secured bonds) must be > paid in full before anyone else gets a red cent > (in theory, because with lawyers you generally > need to give others a couple of dimes so they > promise not to sue). > > In a prepackaged bankruptcy, creditors meet > beforehand and “divvy up” the company BEFORE the > Chapter 11 filing, although I’ve never, ever, > ever, ever heard of an unsecured bond recovering > more than a secured bond, nor could I think of any > bizarrely wild and off the wall scenario where > this could ever happen. > > I work in the top of the capital structure > (leveraged loans), and NOBODY gets a dime before > I’m paid in full; it just wouldn’t ever happen - > that’s why being “secured” is so much better than > being “unsecured”. do you work for a CLO buying B loans? I too work with leveraged loans…
Lol, sounds like bluecollar and I work in the same field…
I soitanly do. How are your OC tests coming along?
skillionaire Wrote: ------------------------------------------------------- > I soitanly do. > > How are your OC tests coming along? I don’t work for a CLO…I used to be on the sell-side syndicating LBO backed B loans to CLO’s, other credit opportunities funds, finance co’s and banks. now I originate senior secured loans to hold on our books…and maybe sometime do a club deal here and there.
So I can blame your aggressive underwriting standards for the shitstorm I inherited?
skillionaire Wrote: ------------------------------------------------------- > So I can blame your aggressive underwriting > standards for the shitstorm I inherited? I suppose; though I was an analyst then. I just modeled, made pitch books and wrote Investment Memorandums, of course most of the structuring / pricing was done by the MD’s. Out of curiosity, where are you located?
No first hand experience, but what the book is saying is simply that there is a difference between ch 7 and ch 11 with regards to the absolute priority rule, which is always enforced under ch 7 but not always under ch 11. Now, could the court under ch 11 dictate something on the secured lenders which they do not agree with? The book essentially says yes, while some folks here say no way.
Dreary Wrote: ------------------------------------------------------- > No first hand experience, but what the book is > saying is simply that there is a difference > between ch 7 and ch 11 with regards to the > absolute priority rule, which is always enforced > under ch 7 but not always under ch 11. Now, could > the court under ch 11 dictate something on the > secured lenders which they do not agree with? The > book essentially says yes, while some folks here > say no way. unless there is a gaping hole in the Intercreditor agreement between the secured and the unsecured debt, there is no way a judge can make the secured take a loss and give some of the proceeds to the unsecured. i have never heard / read of this happening, unless the intercreditor was negotiated very loosely (height of the market). this is the whole reason why pricing on secured debt is peanuts compared to unsecured debt.
100% agree with Bluecollar, and I’m about an hour away from NYC, in a relatively popular place for asset managers in New Jersey. And Dreary, I don’t care what the book says, that ain’t hapnin’.