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99 Cards in this Set
- Front
- Back
What is a distressed debt? |
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 |
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Is the distressed market an efficient market? Why or why not? |
Not efficient. 3 reasons: there isn’t equal accesss to info. People don’t behave rationally. High transaction costs in distressed markets. |
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What is a fallen angel? |
Investment grade bond that becomes a high yield bond. |
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Companies can become troubled companies due to: |
Bad management Bankrupt supplier Bankrupt distributor |
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A company can generate cash flow from: |
Operations Sale of real estate Sale of business |
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Assets = |
Liabilities plus equity |
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If assets decrease in value, what happens to the other side of the equation |
Equity decreases And liabilities can increase |
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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 |
False, subordinate can not recover more than the senior secured |
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Why do companies file bankruptcy |
Because their cash flows don’t aid/cover their financial needs |
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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 |
Out of court |
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All but 3 bank lenders agree. The one that doesn’t agree us called |
A hold out |
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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? |
Yes, they hold more than 2/3 of the money. |
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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? |
Yes, they hold more than 2/3 of the money. |
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who can file the company |
The debtors or creditors |
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Where can they file |
Company headquarters, location of business, manufacturing plant |
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Where a company files bankruptcy is called |
Jurisdiction |
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What is in the disclosure statement |
Provides sufficient info of the debtors for creditors to vote. And what will happen after bankruptcy |
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How many days does management have to put forth a plan of reorganization? |
120 days |
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What classes vote on the plan of reorganization? |
Impaired class= not getting 100cents on the dollar. |
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What is the minimum number of holders in number and dollar amount that are required to vote yes for the plan to be confirmed? |
More than 50% of holders 2/3 in amount of money |
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What are the 4 tests required for the plan to be confirmed. Briefly describe. Bgfc |
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 |
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Define dip |
Debtors in possession financing |
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Main players in bankruptcy? |
Debtors Creditors Equity Lawyers and financial advisors |
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What are the two types of bankruptcy |
Chapter 11- reorganization Chapter 7- liquidation |
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What is the goal of bankruptcy and how long does it take. |
To modify debt, operations or structure of company.
Rule of thumb is 18 months |
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What is needed to sell security? |
Big boy letter |
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Bonds security or not? As distressed debt? |
Only security if governed by ICC |
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How does a company become distressed |
Bad management Bankrupt distributor Supplier |
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When investing in distressed, markets look at |
Cause of distress How to resolve The implications and steps to get into restructuring Will you get new or different securities |
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Who invests in distressed debt |
Hedge funds |
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What are the precursors to default |
Economic performance New/low rated bonds issued Capital market liquidity Industry shake up Interest rate Bank lending policies Economic shift |
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What is the formula for CAPM(capital asset pricing model) |
Rr = RF + B(RM-RF)
Required return = risk free rate +beta(risk market - risk free rate) |
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What is the formula for CAPM(capital asset pricing model) |
Rr = RF + B(RM-RF)
Required return = risk free rate +beta(risk market - risk free rate) |
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How can a company create value? |
Creating cash flow such as selling assets, intellectual property, cash from investors |
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When investing in distressed markets |
You must look at all factors |
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Out of court can you force someone to change their vote? |
No, but if two vote, the third person can be stripped of security.
Can’t be forced to change par, coupon or maturity |
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What comes with an out of court restricting? |
Lots of liabilities, high risk of being sued |
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What two factors play a role in out of court? |
Deal has to be practical, feasible, effective |
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In court restricting can someone be forced to agree to the terms? |
Yes |
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Who manages the company during bankruptcy? |
Current management, when reputation is permitting |
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How can a company preserve cash? |
By pushing accounts payable: not paying their suppliers |
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What committee is formed when a company files? And how many creditors serve |
An official unsecured creditor committee 7 largest creditors |
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2 reasons why a creditor wouldn’t serve on the committee? |
Can’t reveal private info. They know they won’t hold on to the committee
They can’t live up to their fiduciary responsibility |
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What’s a syndicated deal? |
Deal brought to the table from a bank. Once purchased the bank leads the restructuring |
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Who votes on the plan? |
Impaired class only |
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Confirmation of the plan needs: |
Greater than 50% of holders
2/3 in amount of money |
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Two ways the company and investors can expedite the process is through |
Pre-negotiated plan Prepackaged |
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What is a free fall |
When filling is done abruptly and one side files without telling |
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4 main objectives with chapter 11 |
Stabilize the company/provide liquidity needs Develop a going forward business plan Look at the legitimacy of the company and claims Reorganize or liquidate |
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What is a distressed bond? |
A bond trading with a yield to maturity greater than 1000 basis points more than a comparable treasury bond. |
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Why study valuation and what does it involve? |
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. |
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What are 2 main ways to value a firm and which is most commonly seen when value of debt. |
Discounted cash flow Comparable multiple (ebitda multiple) Second is more common |
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Give 1 limitation for the valuation method that is used less often. |
Discounted cash flow is used less because it is time consuming and because the further out on projections the harder it is to predict |
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List two alternatives to the main ways to value a firm. |
Revenue based Asset based Consumed based And liquidation based valuation |
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The value of a firm is discounted future value of its cash flow |
True |
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EBITDA should only contain recurring items |
True |
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When you look at a company for potential investment you want to make sure capital structure is prudent |
True |
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EBITDA volatility lowers a firms debt repayment capacity |
True |
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The riskier the investment the higher the return required by investors. |
True |
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In an out of court restructuring you need 100% consent of the lenders in that class to change any material contractual term |
True |
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Title of the debt is the most important thing when deciding whether or not to invest |
False |
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Leverage lowers a firms debt repayment capacity |
True |
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Volatile cash flows make it more difficult to assess a borrowers debt capacity |
True |
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Credit risk is the probability principale and interest not paid on time |
True |
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Band are risk averse due to their business model and regulatory oversight |
True |
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Distressed debt investing has a pre bankruptcy strategy and a post bankrupt strategy |
True |
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The bankruptcy court must approve the disclosure statement before it is sent to creditors |
True |
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What is the enterprise value and how is it calculated |
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 |
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Credit risk is a function of what three things |
Leverage Priority Time |
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CAPM formula |
Rr = Rf + B (RM-RF) |
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What are the two types of credit support |
Collateral assets Cash flow |
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A company’s EBITDA is as follows: 1-50, 2-60, 6-55 |
50-55 can be supported |
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How does a company get cash in a bankruptcy |
Dip financing |
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Which tranche will you recommend and why. Pick one and give one reason |
Senior debt because operating companies closer to the assets |
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What is the enterprise value MULTIPLE of spooky Halloween? |
Market value + bank debt+ senior bonds = # # / EBITDA multiple = multiple
300+100+200=600 600/100=6x |
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Companies in the same industry are trading at an enterprise multiple of 5x. Based on what is stated above is spooky Halloween overvalued |
Yes over valued |
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What is the enterprise value of spooky Halloween? |
MVEQ+MVdebt - cash = enterprise value |
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Example of non recurring charge thqt you would back out of selling general and administrative cost when calculating EBITDA |
Severance Closing a plant |
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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. |
Out of court |
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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? |
Impaired class only |
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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 |
Only sub debt 50% votes 2/3, 66% of money |
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What is the basic goal of financial due diligence? |
Improve confidence level of ones risk and return investment. Understand the historicals and firm evaluation. |
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What do you look at to perform financial due diligence? |
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 |
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The major players in bankruptcy? |
Debtors, creditors, banks, layered, financial advisory, bankruptcy judge |
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A company’s EBITDA is as follows 75, 73, 70, , 60, 70.5, 72 |
Between 70-73 is the most prudent |
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What is the enterprise value and how is it calculated? |
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 |
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Credit risk is a function of what three things |
Leverage Priority And time |
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Two types of credit support |
Collateral Cash flow |
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How many creditors are required to file a company involuntarily? |
3 creditors |
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Volatile cash flows make it more difficult to assess a borrowers debt capacity? |
True |
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Companies can obtain and borrow on a dip facility before they file chapter 11? True or false? |
False |
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Prior to a company filing bankruptcy bankruptcy what governs the relationship between the company and lenders? |
Covenants |
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What is adequate protection? |
Cash interest paid to over secured debt in bankruptcy |
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What is equitable subordination? |
When debt gets equitized because the holder of the debt is too involved in the day to day operations of the company |
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List an example of substantive consolidation? |
When a company with 2 subsidiaries with different businesses are treated as 1 company in a bankruptcy |
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Can the company force the 3 bank debt holders to go along with the deal?8 |
I’m an out of court you need 100% consent of the lenders to change any material such as face, interest, maturity, debt amortization |
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Would you recommend that tour boss buy 20mm of winter holidays bank debt? |
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 |
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The subordinated bonds are the fulcrum security. Do they vote on the plan of reorganization? |
Yes, THEYRE the impaired class |
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Trade recommendation? |
Trade in bankruptcy that makes money with 75%. Look and choose what trades will make money |