Financial Restructuring Flashcards

Which type of lender typically has the highest priority claim in a bankruptcy liquidation?

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.

What is the absolute priority rule in Chapter 11 bankruptcy?

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.

What is an out-of-court restructuring also commonly called?

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.

Which financial statement is most critical when assessing a company's immediate liquidity in a crisis?

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.

What is covenant relief in the context of bank debt restructuring?

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.

In financial restructuring, what does 'enterprise value' represent?

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.