CIRA Negotiation & Workout Strategies 3 — Questions and Answers
Question 1: In a Chapter 11 restructuring, a Restructuring Support Agreement (RSA) primarily serves to:
- Automatically confirm a plan of reorganization without a creditor vote
- Lock up key creditor support for a pre-negotiated plan before the formal filing (Correct answer)
- Grant the debtor exclusivity to solicit plan votes for 180 days
- Replace the need for a disclosure statement in a prepackaged case
Correct answer: Lock up key creditor support for a pre-negotiated plan before the formal filing
An RSA (or 'lock-up agreement') secures commitments from major creditors to support a specific reorganization plan, reducing execution risk and shortening the bankruptcy timeline.
Question 2: Which of the following best describes the 'fulcrum security' in a restructuring?
- The most senior secured debt tranche that is paid in full in any scenario
- The class of debt at the point in the capital structure where enterprise value is exhausted, giving that class the most negotiating leverage (Correct answer)
- The equity tranche that retains value after all debt is repaid
- The DIP loan that has priority over all pre-petition claims
Correct answer: The class of debt at the point in the capital structure where enterprise value is exhausted, giving that class the most negotiating leverage
The fulcrum security sits at the inflection point in the capital structure where value 'runs out,' making that creditor class the de facto owner of the reorganized company and the key negotiating counterparty.
Question 3: When negotiating with a debtor's secured lender, a financial advisor for the creditors' committee would most appropriately focus on which analytical output first?
- The debtor's historical GAAP earnings per share
- An enterprise valuation to determine where value breaks in the capital structure (Correct answer)
- The debtor's working capital cycle time
- A comparison of the debtor's employee headcount to industry peers
Correct answer: An enterprise valuation to determine where value breaks in the capital structure
Enterprise valuation is the foundational analysis in restructuring negotiations because it determines recoveries for each creditor class and identifies the fulcrum security.
Question 4: A 'cramdown' plan under Section 1129(b) of the Bankruptcy Code allows a debtor to confirm a plan over the objection of a dissenting class, provided the plan:
- Is supported by at least one impaired accepting class and does not unfairly discriminate or violate the absolute priority rule (Correct answer)
- Has unanimous support from all secured creditor classes
- Pays all unsecured creditors in cash on the effective date
- Has been approved by the U.S. Trustee prior to the confirmation hearing
Correct answer: Is supported by at least one impaired accepting class and does not unfairly discriminate or violate the absolute priority rule
Cramdown requires at least one impaired accepting class (excluding insiders), compliance with the absolute priority rule, and no unfair discrimination among classes.
Question 5: In out-of-court restructuring negotiations, 'haircut' refers to:
- A reduction in the stated principal or face value of debt accepted by the creditor as part of a settlement (Correct answer)
- The legal fee deducted from recoveries by restructuring counsel
- A markdown applied to collateral value during a lender's underwriting review
- The discount applied to new equity issued to existing shareholders
Correct answer: A reduction in the stated principal or face value of debt accepted by the creditor as part of a settlement
A haircut is the reduction in principal that a creditor agrees to accept below par value, effectively forgiving a portion of the debt as a restructuring concession.
Question 6: Which of the following is a key advantage of a prepackaged bankruptcy over a traditional Chapter 11 filing?
- It eliminates the need for court approval of the reorganization plan
- It dramatically shortens the time in bankruptcy because creditor votes are solicited pre-filing (Correct answer)
- It allows the debtor to reject all executory contracts without court approval
- It prevents trade creditors from filing unsecured claims
Correct answer: It dramatically shortens the time in bankruptcy because creditor votes are solicited pre-filing
In a prepackaged bankruptcy, the plan and disclosure statement are prepared and votes solicited before filing, enabling the company to confirm the plan within weeks rather than months or years.
Question 7: A debtor negotiating a sale under Section 363 of the Bankruptcy Code uses a 'stalking horse' bid primarily to:
- Guarantee that the company will be sold to the stalking horse bidder at the agreed price
- Establish a minimum bid floor and attract competing offers through a court-supervised auction (Correct answer)
- Allow the stalking horse bidder to acquire assets free of all tax liabilities
- Avoid the need for creditor committee approval of the sale
Correct answer: Establish a minimum bid floor and attract competing offers through a court-supervised auction
A stalking horse bid sets a baseline price and deal terms, ensuring a minimum recovery while creating competitive tension that can increase the final sale price through an auction.
CIRA Negotiation & Workout Strategies 3
In a Chapter 11 restructuring, a Restructuring Support Agreement (RSA) primarily serves to: