Debt Restructuring & Management Flashcards

What is the primary purpose of a 'standstill agreement' in debt restructuring?

Answer: To temporarily suspend creditor enforcement actions while restructuring is negotiated

A standstill agreement gives the debtor temporary relief from creditor collection actions, providing time to negotiate a comprehensive restructuring without immediate enforcement pressure.

A company restructures by issuing new equity to creditors in exchange for cancellation of debt. What type of transaction is this?

Answer: Debt-for-equity swap

A debt-for-equity swap converts outstanding debt obligations into ownership stakes, reducing the company's leverage while giving creditors equity in the reorganized entity.

In the context of Chapter 11, what is a 'stalking horse bidder'?

Answer: An initial bidder who sets the baseline price for asset sales subject to higher bids

A stalking horse bidder enters a purchase agreement with the debtor that establishes a floor price and terms for asset sales, subject to competitive overbids at auction.

Which financial metric is most commonly used to measure a company's ability to service debt obligations?

Answer: Debt service coverage ratio (DSCR)

The debt service coverage ratio (DSCR) measures operating income relative to debt service obligations, indicating whether the company generates sufficient cash flow to meet its debt payments.

What distinguishes 'first lien' debt from 'second lien' debt in a restructuring?

Answer: First lien debt has priority in recovery over collateral proceeds before second lien holders are paid

First lien creditors have senior priority claims on collateral and are paid in full from collateral proceeds before second lien holders receive any distribution.

What is 'covenant-lite' debt and why is it significant in restructurings?

Answer: Debt with fewer or no maintenance financial covenants, reducing early default triggers

Covenant-lite loans lack traditional maintenance covenants that would trigger default on declining financial metrics, giving borrowers more flexibility but reducing lender early warning signals.

In a Chapter 11 case, what is the 'absolute priority rule' most directly concerned with?

Answer: The requirement that senior creditors be paid in full before junior creditors receive any plan distribution

The absolute priority rule requires that each senior class receive full satisfaction of its claims before any junior class receives value under the reorganization plan.