Debt Restructuring & Management Flashcards

What is 'debtor-in-possession' (DIP) financing and what makes it attractive to lenders?

Answer: Post-petition financing that receives super-priority administrative expense status under Section 364

DIP financing is new credit extended to a Chapter 11 debtor that typically receives super-priority status over pre-existing claims, making it attractive because lenders have priority repayment rights.

Which section of the Bankruptcy Code governs the assumption or rejection of executory contracts in Chapter 11?

Answer: Section 365

Section 365 allows the debtor-in-possession to assume beneficial executory contracts (curing defaults) or reject burdensome ones, treating rejection as a pre-petition breach.

A company has $10M in EBITDA and $80M in debt. What is its leverage ratio and what does it suggest?

Answer: 8x, indicating the company is highly leveraged and may face restructuring

A debt-to-EBITDA ratio of 8x ($80M/$10M) indicates very high leverage; ratios above 5-6x often signal elevated default risk and potential need for restructuring.

What is the purpose of a 'lock-up agreement' in a distressed debt restructuring?

Answer: To bind key creditors to support a specific restructuring plan before it is formally filed

A lock-up agreement secures advance commitments from major creditors to vote in favor of an agreed restructuring plan, ensuring sufficient support before the formal process begins.

When a secured creditor is 'undersecured,' what does this mean in the context of an allowed claim?

Answer: The collateral value is less than the outstanding debt, so the creditor has both a secured claim and an unsecured deficiency claim

An undersecured creditor's claim is bifurcated: the secured portion equals the collateral's value, and any excess is treated as an unsecured claim under Section 506(a).

In distressed debt investing, what does 'loan-to-own' strategy describe?

Answer: Buying distressed debt cheaply with the intent to convert it to equity through restructuring and gain control of the company

Loan-to-own investors acquire distressed debt at deep discounts, expecting to convert their claims to equity in a reorganization, ultimately gaining control of the restructured company.

What is 'equitable subordination' under Section 510(c) of the Bankruptcy Code?

Answer: A court's power to subordinate a claim or lien to other claims based on inequitable conduct by the claimant

Equitable subordination allows a bankruptcy court to reorder claim priorities when a creditor engaged in inequitable conduct that harmed other creditors, such as fraud or breach of fiduciary duty.