CBS Debt Restructuring & Management 3 — Questions and Answers
Question 1: What is the primary purpose of a 'standstill agreement' in debt restructuring?
- To freeze asset sales permanently
- To temporarily suspend creditor enforcement actions while restructuring is negotiated (Correct answer)
- To halt all interest accruals indefinitely
- To prevent new debt issuance by the debtor
Correct 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.
Question 2: A company restructures by issuing new equity to creditors in exchange for cancellation of debt. What type of transaction is this?
- Leveraged recapitalization
- Debt-for-equity swap (Correct answer)
- Distressed debt purchase
- Mezzanine financing
Correct 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.
Question 3: In the context of Chapter 11, what is a 'stalking horse bidder'?
- A creditor who opposes the reorganization plan
- An initial bidder who sets the baseline price for asset sales subject to higher bids (Correct answer)
- A trustee appointed to monitor asset management
- A secured creditor who forecloses on collateral
Correct 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.
Question 4: Which financial metric is most commonly used to measure a company's ability to service debt obligations?
- Gross margin ratio
- Debt service coverage ratio (DSCR) (Correct answer)
- Return on equity
- Current ratio
Correct 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.
Question 5: What distinguishes 'first lien' debt from 'second lien' debt in a restructuring?
- First lien debt has a higher interest rate
- First lien debt has priority in recovery over collateral proceeds before second lien holders are paid (Correct answer)
- First lien debt is always unsecured
- First lien debt matures before second lien debt
Correct 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.
Question 6: What is 'covenant-lite' debt and why is it significant in restructurings?
- Debt with no maturity date
- Debt with fewer or no maintenance financial covenants, reducing early default triggers (Correct answer)
- Debt secured by lightweight assets
- Debt with automatic interest rate reductions
Correct 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.
Question 7: In a Chapter 11 case, what is the 'absolute priority rule' most directly concerned with?
- The order in which administrative expenses are paid
- The requirement that senior creditors be paid in full before junior creditors receive any plan distribution (Correct answer)
- The priority of secured vs. unsecured claims
- The deadline for filing proofs of claim
Correct 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.
CBS Debt Restructuring & Management 3
What is the primary purpose of a 'standstill agreement' in debt restructuring?