CBS Debt Restructuring & Management 4

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

Section 365

Answer

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.

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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).

(CBS) Certified Bankruptcy Specialist Practice Test

(CBS) Certified Bankruptcy Specialist Practice Test

CBS Debt Restructuring & Management 4