TMA Financial Restructuring 2 — Questions and Answers
Question 1: Which type of lender typically has the highest priority claim in a bankruptcy liquidation?
- Equity shareholders
- Unsecured bondholders
- Secured senior lenders (Correct answer)
- Preferred stockholders
Correct answer: Secured senior lenders
Secured senior lenders hold claims backed by collateral and are paid first in a liquidation, ahead of unsecured creditors and equity holders.
Question 2: What is the absolute priority rule in Chapter 11 bankruptcy?
- Senior management is paid first
- Creditors must be paid in full before equity holders receive anything (Correct answer)
- Employees have priority over all other claims
- The IRS always receives first payment
Correct answer: Creditors must be paid in full before equity holders receive anything
The absolute priority rule requires that senior creditors be paid in full before any value flows to junior creditors or equity holders in a reorganization plan.
Question 3: What is an out-of-court restructuring also commonly called?
- Prepackaged deal
- Workout (Correct answer)
- Liquidation
- Receivership
Correct answer: Workout
An out-of-court restructuring is often called a workout, where a company negotiates directly with creditors to modify debt terms without filing for bankruptcy.
Question 4: Which financial statement is most critical when assessing a company's immediate liquidity in a crisis?
- Income statement
- Balance sheet equity section
- Cash flow statement (Correct answer)
- Statement of retained earnings
Correct answer: Cash flow statement
The cash flow statement, particularly the 13-week cash flow forecast, is most critical in a distress situation to assess whether the company can meet near-term obligations.
Question 5: What is covenant relief in the context of bank debt restructuring?
- Eliminating all bank covenants permanently
- Temporarily waiving or modifying financial covenants a company has breached (Correct answer)
- Reducing the interest rate on a loan
- Transferring the loan to a new lender
Correct answer: Temporarily waiving or modifying financial covenants a company has breached
Covenant relief involves lenders temporarily waiving or amending financial covenants that a distressed borrower has violated to avoid triggering default.
Question 6: In financial restructuring, what does 'enterprise value' represent?
- The total market capitalization of equity
- The total value of the business to all stakeholders, including debt and equity (Correct answer)
- Only the liquidation value of assets
- The book value of shareholders' equity
Correct answer: The total value of the business to all stakeholders, including debt and equity
Enterprise value represents the total value of a business to all capital providers — both debt and equity — and is the key metric in distributing value during restructuring.
TMA Financial Restructuring 2
Which type of lender typically has the highest priority claim in a bankruptcy liquidation?