Special Topics

Front 1

What is a distressed debt?

Back 1

Debt trading with a yield to maturity of greater than 1000basis points more than a comparable treasury.

Ex. Bank debt, trade claim, structured debt, stock and bonds

Front 2

Is the distressed market an efficient market? Why or why not?

Back 2

Not efficient. 3 reasons: there isn’t equal accesss to info. People don’t behave rationally. High transaction costs in distressed markets.

Front 3

What is a fallen angel?

Back 3

Investment grade bond that becomes a high yield bond.

Front 4

Companies can become troubled companies due to:

Back 4

Bad management

Bankrupt supplier

Bankrupt distributor

Front 5

A company can generate cash flow from:

Back 5

Operations

Sale of real estate

Sale of business

Front 6

Assets =

Back 6

Liabilities plus equity

Front 7

If assets decrease in value, what happens to the other side of the equation

Back 7

Equity decreases

And liabilities can increase

Front 8

In a restructuring it is possible for senior secured bank debt to recover 50 cents on the dollar and the subordinate bonds to recover 60 cents on the dollar? True or false

Back 8

False, subordinate can not recover more than the senior secured

Front 9

Why do companies file bankruptcy

Back 9

Because their cash flows don’t aid/cover their financial needs

Front 10

Cool air conditioning is going to have a hard time making their debt amortization payments in 2019. They approach their bank lenders. This restructuring is called

Back 10

Out of court

Front 11

All but 3 bank lenders agree. The one that doesn’t agree us called

Back 11

A hold out

Front 12

The 3 that don’t agree hold a total of 300mm in bank debt. Will the company agree to the deal negotiated by the other 7 holders? Why or why not?

Back 12

Yes, they hold more than 2/3 of the money.

Front 13

The 3 that don’t agree hold a total of 300mm in bank debt. Will the company agree to the deal negotiated by the other 7 holders? Why or why not?

Back 13

Yes, they hold more than 2/3 of the money.

Front 14

who can file the company

Back 14

The debtors or creditors

Front 15

Where can they file

Back 15

Company headquarters, location of business, manufacturing plant

Front 16

Where a company files bankruptcy is called

Back 16

Jurisdiction

Front 17

What is in the disclosure statement

Back 17

Provides sufficient info of the debtors for creditors to vote. And what will happen after bankruptcy

Front 18

How many days does management have to put forth a plan of reorganization?

Back 18

120 days

Front 19

What classes vote on the plan of reorganization?

Back 19

Impaired class= not getting 100cents on the dollar.

Front 20

What is the minimum number of holders in number and dollar amount that are required to vote yes for the plan to be confirmed?

Back 20

More than 50% of holders

2/3 in amount of money

Front 21

What are the 4 tests required for the plan to be confirmed. Briefly describe.

Bgfc

Back 21

Best interest in creditors: determine if liquidation is best and position of company

Good faith: proposed in good faith

Feasibility: testing that the company won’t result in liquidation or company should be fine in 2 years

Consent test: two impaired classes

Front 22

Define dip

Back 22

Debtors in possession financing

Front 23

Main players in bankruptcy?

Back 23

Debtors

Creditors

Equity

Lawyers and financial advisors

Front 24

What are the two types of bankruptcy

Back 24

Chapter 11- reorganization

Chapter 7- liquidation

Front 25

What is the goal of bankruptcy and how long does it take.

Back 25

To modify debt, operations or structure of company.

Rule of thumb is 18 months

Front 26

What is needed to sell security?

Back 26

Big boy letter

Front 27

Bonds security or not? As distressed debt?

Back 27

Only security if governed by ICC

Front 28

How does a company become distressed

Back 28

Bad management

Bankrupt distributor

Supplier

Front 29

When investing in distressed, markets look at

Back 29

Cause of distress

How to resolve

The implications and steps to get into restructuring

Will you get new or different securities

Front 30

Who invests in distressed debt

Back 30

Hedge funds

Front 31

What are the precursors to default

Back 31

Economic performance

New/low rated bonds issued

Capital market liquidity

Industry shake up

Interest rate

Bank lending policies

Economic shift

Front 32

What is the formula for CAPM(capital asset pricing model)

Back 32

Rr = RF + B(RM-RF)

Required return = risk free rate +beta(risk market - risk free rate)

Front 33

What is the formula for CAPM(capital asset pricing model)

Back 33

Rr = RF + B(RM-RF)

Required return = risk free rate +beta(risk market - risk free rate)

Front 34

How can a company create value?

Back 34

Creating cash flow such as selling assets, intellectual property, cash from investors

Front 35

When investing in distressed markets

Back 35

You must look at all factors

Front 36

Out of court can you force someone to change their vote?

Back 36

No, but if two vote, the third person can be stripped of security.

Can’t be forced to change par, coupon or maturity

Front 37

What comes with an out of court restricting?

Back 37

Lots of liabilities, high risk of being sued

Front 38

What two factors play a role in out of court?

Back 38

Deal has to be practical, feasible, effective

Front 39

In court restricting can someone be forced to agree to the terms?

Back 39

Yes

Front 40

Who manages the company during bankruptcy?

Back 40

Current management, when reputation is permitting

Front 41

How can a company preserve cash?

Back 41

By pushing accounts payable: not paying their suppliers

Front 42

What committee is formed when a company files? And how many creditors serve

Back 42

An official unsecured creditor committee

7 largest creditors

Front 43

2 reasons why a creditor wouldn’t serve on the committee?

Back 43

Can’t reveal private info.

They know they won’t hold on to the committee

They can’t live up to their fiduciary responsibility

Front 44

What’s a syndicated deal?

Back 44

Deal brought to the table from a bank. Once purchased the bank leads the restructuring

Front 45

Who votes on the plan?

Back 45

Impaired class only

Front 46

Confirmation of the plan needs:

Back 46

Greater than 50% of holders

2/3 in amount of money

Front 47

Two ways the company and investors can expedite the process is through

Back 47

Pre-negotiated plan

Prepackaged

Front 48

What is a free fall

Back 48

When filling is done abruptly and one side files without telling

Front 49

4 main objectives with chapter 11

Back 49

Stabilize the company/provide liquidity needs

Develop a going forward business plan

Look at the legitimacy of the company and claims

Reorganize or liquidate

Front 50

What is a distressed bond?

Back 50

A bond trading with a yield to maturity greater than 1000 basis points more than a comparable treasury bond.

Front 51

Why study valuation and what does it involve?

Back 51

It helps distressed investors look at the work of a company and future possibilities. It determines what is a good investment.

Involves assessing the asset value and the capital structure that matches.

Front 52

What are 2 main ways to value a firm and which is most commonly seen when value of debt.

Back 52

Discounted cash flow

Comparable multiple (ebitda multiple)

Second is more common

Front 53

Give 1 limitation for the valuation method that is used less often.

Back 53

Discounted cash flow is used less because it is time consuming and because the further out on projections the harder it is to predict

Front 54

List two alternatives to the main ways to value a firm.

Back 54

Revenue based

Asset based

Consumed based

And liquidation based valuation

Front 55

The value of a firm is discounted future value of its cash flow

Back 55

True

Front 56

EBITDA should only contain recurring items

Back 56

True

Front 57

When you look at a company for potential investment you want to make sure capital structure is prudent

Back 57

True

Front 58

EBITDA volatility lowers a firms debt repayment capacity

Back 58

True

Front 59

The riskier the investment the higher the return required by investors.

Back 59

True

Front 60

In an out of court restructuring you need 100% consent of the lenders in that class to change any material contractual term

Back 60

True

Front 61

Title of the debt is the most important thing when deciding whether or not to invest

Back 61

False

Front 62

Leverage lowers a firms debt repayment capacity

Back 62

True

Front 63

Volatile cash flows make it more difficult to assess a borrowers debt capacity

Back 63

True

Front 64

Credit risk is the probability principale and interest not paid on time

Back 64

True

Front 65

Band are risk averse due to their business model and regulatory oversight

Back 65

True

Front 66

Distressed debt investing has a pre bankruptcy strategy and a post bankrupt strategy

Back 66

True

Front 67

The bankruptcy court must approve the disclosure statement before it is sent to creditors

Back 67

True

Front 68

What is the enterprise value and how is it calculated

Back 68

The market value of a company adjusted to consider debt and cash.

What it should be: EBITDA x multiple

What it is: MVEq + MVD - Cash

Front 69

Credit risk is a function of what three things

Back 69

Leverage

Priority

Time

Front 70

CAPM formula

Back 70

Rr = Rf + B (RM-RF)

Front 71

What are the two types of credit support

Back 71

Collateral assets

Cash flow

Front 72

A company’s EBITDA is as follows: 1-50, 2-60, 6-55

Back 72

50-55 can be supported

Front 73

How does a company get cash in a bankruptcy

Back 73

Dip financing

Front 74

Which tranche will you recommend and why. Pick one and give one reason

Back 74

Senior debt because operating companies closer to the assets

Front 75

What is the enterprise value MULTIPLE of spooky Halloween?

Back 75

Market value + bank debt+ senior bonds = #

# / EBITDA multiple = multiple

300+100+200=600

600/100=6x

Front 76

Companies in the same industry are trading at an enterprise multiple of 5x. Based on what is stated above is spooky Halloween overvalued

Back 76

Yes over valued

Front 77

What is the enterprise value of spooky Halloween?

Back 77

MVEQ+MVdebt - cash = enterprise value

Front 78

Example of non recurring charge thqt you would back out of selling general and administrative cost when calculating EBITDA

Back 78

Severance

Closing a plant

Front 79

Company can no longer make their monthly amortization payments on their existing bank debt. They approach their borrowers. This is called what type of restructure.

Back 79

Out of court

Front 80

They do not come to an agreement with their bank due to hold outs. As a result they need to file chapter 11. Plan of reorganization in the bank debt is unimpaired and the sub debt is impaired. What classes need to vote?

Back 80

Impaired class only

Front 81

There are currently 10 holders of senior debt and 5 holders of sub debt(each holding 40mm). His many in number and percent need to vote for the plan to be approved

Back 81

Only sub debt 50% votes

2/3, 66% of money

Front 82

What is the basic goal of financial due diligence?

Back 82

Improve confidence level of ones risk and return investment. Understand the historicals and firm evaluation.

Front 83

What do you look at to perform financial due diligence?

Back 83

The financials from 2 years such as their capital structure which is their debt outstanding.

Their comps: competitors

Their leverage and the value of their debt

Front 84

The major players in bankruptcy?

Back 84

Debtors, creditors, banks, layered, financial advisory, bankruptcy judge

Front 85

A company’s EBITDA is as follows 75, 73, 70, , 60, 70.5, 72

Back 85

Between 70-73 is the most prudent

Front 86

What is the enterprise value and how is it calculated?

Back 86

It’s the market value of a company adjusted to consider debt to cash.

MVEQ+MVD- cash

If debt is trading below par forget cash

Front 87

Credit risk is a function of what three things

Back 87

Leverage

Priority

And time

Front 88

Two types of credit support

Back 88

Collateral

Cash flow

Front 89

How many creditors are required to file a company involuntarily?

Back 89

3 creditors

Front 90

Volatile cash flows make it more difficult to assess a borrowers debt capacity?

Back 90

True

Front 91

Companies can obtain and borrow on a dip facility before they file chapter 11? True or false?

Back 91

False

Front 92

Prior to a company filing bankruptcy bankruptcy what governs the relationship between the company and lenders?

Back 92

Covenants

Front 93

What is adequate protection?

Back 93

Cash interest paid to over secured debt in bankruptcy

Front 94

What is equitable subordination?

Back 94

When debt gets equitized because the holder of the debt is too involved in the day to day operations of the company

Front 95

List an example of substantive consolidation?

Back 95

When a company with 2 subsidiaries with different businesses are treated as 1 company in a bankruptcy

Front 96

Can the company force the 3 bank debt holders to go along with the deal?8

Back 96

I’m an out of court you need 100% consent of the lenders to change any material such as face, interest, maturity, debt amortization

Front 97

Would you recommend that tour boss buy 20mm of winter holidays bank debt?

Back 97

Yes, winter has higher evitada, so other competitors are under valued so there is more opportunity for growth

They can find other supplies to fix their problem

Front 98

The subordinated bonds are the fulcrum security. Do they vote on the plan of reorganization?

Back 98

Yes, THEYRE the impaired class

Front 99

Trade recommendation?

Back 99

Trade in bankruptcy that makes money with 75%. Look and choose what trades will make money