CTP CTP Capital Markets & Financing Alternatives 2 — Questions and Answers
Question 1: A company executes an 'out-of-court exchange offer.' What is occurring?
- The company offers existing bondholders new securities at modified terms to reduce debt without filing bankruptcy (Correct answer)
- The company sells its equity on a secondary market exchange
- The company exchanges one secured lien for another of equal value
- The court mandates a swap of equity for debt among creditors
Correct answer: The company offers existing bondholders new securities at modified terms to reduce debt without filing bankruptcy
An exchange offer is a voluntary, out-of-court mechanism to reduce or modify debt by swapping old securities for new ones with different terms, avoiding the cost and delay of bankruptcy.
Question 2: In a distressed situation, what is a 'pre-packaged bankruptcy'?
- A Chapter 11 filing where the debtor has obtained creditor votes on the reorganization plan before filing (Correct answer)
- A bankruptcy case where assets are sold within 30 days of filing
- A liquidation plan filed simultaneously with the bankruptcy petition
- A Chapter 7 case with a pre-approved trustee
Correct answer: A Chapter 11 filing where the debtor has obtained creditor votes on the reorganization plan before filing
A prepackaged bankruptcy pre-negotiates and votes on the reorganization plan before filing, dramatically compressing the time and cost of the court process.
Question 3: What distinguishes a 'term loan B' (TLB) from a traditional bank term loan in leveraged finance?
- TLBs are held by institutional investors, have minimal amortization, and trade in secondary markets, making them common in highly leveraged structures (Correct answer)
- TLBs carry government guarantees and lower interest rates than bank loans
- TLBs require quarterly principal repayment of 25% of the original balance
- TLBs are only available to investment-grade borrowers
Correct answer: TLBs are held by institutional investors, have minimal amortization, and trade in secondary markets, making them common in highly leveraged structures
Term Loan B structures are designed for institutional lenders like CLOs and hedge funds, with bullet-like repayment profiles that make them flexible for leveraged transactions.
Question 4: What is the role of a 'backstop party' in a rights offering?
- A party that commits to purchase any unsubscribed shares, guaranteeing the capital raise closes (Correct answer)
- A lender that provides bridge financing until the rights offering closes
- A creditor committee member who vetoes unfavorable plan terms
- An investment bank that markets the offering to new investors
Correct answer: A party that commits to purchase any unsubscribed shares, guaranteeing the capital raise closes
The backstop party assumes the underwriting risk of the rights offering, ensuring the reorganized company raises the full targeted capital even if other stakeholders don't exercise their rights.
Question 5: Which metric do lenders most commonly use to size debt capacity for a distressed borrower seeking exit financing?
- Total debt / EBITDA (leverage ratio), typically benchmarked against comparable restructured companies (Correct answer)
- Price-to-earnings ratio relative to industry peers
- Debt service coverage ratio based on pre-distress earnings
- Book value of equity divided by total liabilities
Correct answer: Total debt / EBITDA (leverage ratio), typically benchmarked against comparable restructured companies
Leverage ratios set the ceiling on how much debt the reorganized company can support relative to its projected cash earnings, forming the basis of exit financing sizing.
Question 6: What is a 'last-out' tranche in an ABL facility?
- A portion of the revolving credit that bears higher interest and is the last to be repaid, often used to provide additional liquidity in distressed deals (Correct answer)
- The final draw on a construction loan upon project completion
- Equity contributed by management as the last layer of the capital stack
- A subordinated term loan added to a revolving ABL facility
Correct answer: A portion of the revolving credit that bears higher interest and is the last to be repaid, often used to provide additional liquidity in distressed deals
Last-out tranches allow distressed borrowers to access more liquidity from their ABL than the standard borrowing base supports, with that extra tranche repaid after the rest of the facility.
CTP CTP Capital Markets & Financing Alternatives 2
A company executes an 'out-of-court exchange offer.' What is occurring?