CTP Capital Markets & Financing Alternatives Flashcards
6 cards from real CTP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CTP Capital Markets & Financing Alternatives flashcards as text
What is 'payment-in-kind' (PIK) interest, and why is it used in distressed financing?
Answer: Interest that accrues and is added to the loan principal rather than paid in cash, preserving the borrower's liquidity
PIK interest defers the cash burden of interest payments, giving a distressed company breathing room while still accruing the obligation for future repayment.
In a Chapter 11 reorganization, what is the 'absolute priority rule'?
Answer: Senior creditor classes must be paid in full before junior classes receive any recovery under the plan
The absolute priority rule enforces the contractual hierarchy of the capital structure in bankruptcy, ensuring senior claims are satisfied before junior claimants receive anything.
What distinguishes 'senior secured' debt from 'senior unsecured' debt in a recovery analysis?
Answer: Senior secured debt is backed by specific collateral, giving holders a direct claim on assets; senior unsecured debt has no collateral pledge and recovers from residual enterprise value
Collateral backing gives secured creditors a priority claim on specific assets in liquidation or reorganization, typically resulting in materially higher recovery rates than unsecured creditors.
A CTP practitioner recommends a 'sale-leaseback' of real estate. What is the financial rationale?
Answer: The company monetizes owned real estate by selling it and leasing it back, converting an illiquid asset into immediate cash while retaining use of the property
A sale-leaseback releases the equity locked in real property, providing a one-time cash infusion to address liquidity needs while operational continuity is preserved through the lease.
What is the significance of 'cross-default' provisions in debt agreements for a distressed company?
Answer: A default under one debt agreement automatically triggers default under other agreements containing the clause, potentially accelerating all obligations simultaneously
Cross-default provisions can cascade a single covenant breach into a company-wide credit event, giving lenders across multiple facilities the right to accelerate repayment simultaneously.
When evaluating a distressed company's capital structure, what is 'enterprise value' (EV) and why is it central to recovery analysis?
Answer: EV is the total value of the business to all capital providers, and it determines how much value is available to distribute across the debt and equity stack in a restructuring
Enterprise value sets the total pie available to be divided among all claimants — creditors and equity holders — so the relative size of each claim layer versus EV determines actual recoveries.