Bankruptcy History & Law
Which 1978 statute established modern Chapter 11, and what debtor-control concept did it introduce?
The Bankruptcy Reform Act of 1978; the Debtor-in-Possession (DIP), allowing existing management to retain control rather than appointing an outside trustee.
What two types of subsidiaries can receive assets in a dropdown transaction?
UnSub and NGRS
Which 1986 decision validated the combination of an exchange offer and consent solicitation as a carrot-and-stick restructuring tool?
Katz v. Oak Industries (1986).
Which three negative covenant baskets does the deck specifically identify as critical to LME structuring?
Investment baskets, restricted-payment baskets, and asset-sale baskets.
A company has a $500 million revolving credit facility, $482 million outstanding, and $25 million of cash. What is its available liquidity, assuming no letters of credit?
25+(500-482)= 43
The Chandler Act of 1938 introduced which two bankruptcy chapters?
Chapter X and XI
What contractual exception is commonly used to facilitate an uptier exchange?
The Open Market Purchase exception or similar purchase flexibility, combined with amendments authorizing the issuance of superpriority debt.
In PetSmart/Chewy (2018), what exact percentage of Chewy was transferred, and how was it allocated?
36.5%: 20% to the sponsor and 16.5% to an unrestricted subsidiary.
Which two Bankruptcy Code sections govern the automatic stay and rejection of executory contracts?
Section 362 governs the automatic stay; Section 365 governs executory contracts and unexpired leases.
A company has $1.2 billion of term loans trading at 90, $800 million of unsecured notes trading at 25, and $482 million of revolver borrowings at par. What is its total market value of debt?
1,200(0.90)+800(0.25)+482=1,762
In 1884, which railroad case involved Jay Gould suing himself to trigger an equity receivership?
The Wabash Case (1884).
In a double-dip transaction, identify the two claims created by one dollar of new financing.
First, a direct debt claim supported by the secured parent guarantee. Second, an indirect claim through the pledged intercompany loan receivable.
Which two appellate decisions reached contrasting outcomes concerning purchase language in uptier transactions?
Serta (Fifth Circuit, December 2024), which rejected the private exchange as an open-market purchase, and Mitel (New York Appellate Division, as described in the deck), which upheld an uptier under broader purchase language.
A lender holds a $500 million secured claim against collateral worth only $350 million. Under the deck's waterfall, how are its claims divided?
$350 million secured claim and $150 million unsecured deficiency claim.
A company has $419 million EBITDA, $243 million cash interest, $240 million capex, and $12 million mandatory amortization. Calculate interest coverage and the deck's fixed-charge coverage ratio.
Interest Coverage=\419/243=1.72x
~1.7x
FCCR}=(419-240)/(243+12)=0.70x
Name all four forms of seniority discussed in the deck and identify which becomes less relevant when bankruptcy accelerates debt obligations.
Contractual, structural, collateral, and temporal seniority. Temporal seniority drops out because claims accelerate in bankruptcy.
In a pari-plus transaction, identify the two layers of creditor priority obtained by the new-money lenders.
Structural seniority over assets dropped into the UnSub/NGRS, plus a pari-passu first-lien claim against the borrower through a secured intercompany loan.
In the Incora uptier, what securities did participating secured and unsecured noteholders receive?
Participating senior secured noteholders received new first-lien notes. Participating unsecured noteholders received new 1.25-lien notes through the unsecured roll-up.
Under the deck's corporate structure framework, which subsidiary classification remains subject to restricted-group covenants but does not guarantee the borrower's debt?
A non-guarantor restricted subsidiary (NGRS).
A company has $419 million of EBITDA, $243 million of cash interest, $240 million of capex, $12 million of mandatory debt amortization, and $25 million of cash. Its $500 million revolver is $482 million drawn.
Assuming EBITDA approximates operating cash flow before interest and capex, no working capital changes, and no cash taxes:
Calculate annual free cash flow after debt service.
Calculate available liquidity.
Assuming no corrective action, approximately how long can the company survive before exhausting liquidity?
Annual FCF = $419M − $243M − $240M − $12M = −$76M.
Liquidity = $25M + ($500M − $482M) = $43M.
Runway = $43M / $76M × 12 = 6.8 months.
What are the two voting thresholds necessary for an impaired creditor class to accept a Chapter 11 plan?
At least two-thirds (66⅔%) in dollar amount and more than one-half in number of allowed claims actually voting in that class.
In the AMC dropdown described in the deck, what specific assets were transferred to MuviCo, and what claims did the out-group at RemainCo receive to settle litigation?
AMC transferred intellectual property and 175 premium theaters to MuviCo. The RemainCo out-group exchanged into 1.5-lien claims at MuviCo.
What is the legal distinction between lien subordination and collateral release, and what contractual protection did lenders introduce after aggressive uptiers?
Subordination changes the relative priority of liens; collateral release extinguishes liens on particular collateral. Lenders introduced Serta blockers, protecting lien subordination as a sacred right
In a collateral-release transaction, why might transferring only a minority stake in a guarantor subsidiary cause the entire guarantee to be released?
If the subsidiary ceases to be wholly owned, it may qualify as an Excluded Subsidiary under the debt documents, triggering release of its guarantee and potentially its liens. This depends on the exact guarantor-release and collateral-release language.
A distressed company has the following capital structure:
Revolver - Face Value: $482m - Market Price: 100
1L TLs - Face Value: $1,200m - Market Price: 90
Unsecured Notes - $800m - Market Price: 25
Assume $25 million cash, a reorganized enterprise value of $1.9 billion, and that the revolver and term loan rank pari passu against all enterprise assets. Assume no administrative claims, priority claims, or other adjustments.
Calculate total net distributable value.
Calculate recoveries for each tranche under absolute priority.
Identify the fulcrum security.
Explain why the unsecured notes might trade at 25 despite receiving a different recovery under your valuation.
1. Net distributable value
EV+Cash=1,900+25=$1,925m
2. Secured recoveries
Total secured debt:
482+1,200=$1,682
Both secured tranches recover 100%, or $482M and $1,200M, respectively.
Remaining value:
1,925-1,682=$243M \
Unsecured recovery:
243/800=30.375
3. Fulcrum security
The unsecured notes are the fulcrum because they are the first class to absorb a partial recovery under this valuation.
4. Why do the notes trade at 25?
The 25-cent trading price is below the modeled 30.375-cent recovery. Possible explanations include lower market-implied enterprise value, restructuring costs, time to resolution, valuation uncertainty, or risk that the assumed recoveries do not materialize.
The trap: The term loan trades at 90 despite receiving 100% in the simplified waterfall. A debt instrument's trading price is not necessarily equal to its modeled bankruptcy recovery, and the lowest-priced tranche is not automatically the fulcrum.