TMA Valuation in Distressed Situations 2

Question 1

What is a 'recovery rate' in distressed debt analysis?

Accepted Answer

The percentage of face value a creditor ultimately recovers on a defaulted claim

Answer

The recovery rate measures how many cents on the dollar a creditor recovers from a distressed investment after the restructuring or liquidation process concludes.

Question 2

What is 'distressed debt investing'?

Accepted Answer

Buying the debt of financially troubled companies at a discount with the goal of profiting from recovery

Answer

Distressed debt investors purchase bonds or loans of troubled companies at steep discounts, aiming to profit either from operational recovery, a restructuring that yields above-purchase-price recovery, or conversion to equity.

Question 3

What is a 'fulcrum security' in a distressed capital structure?

Accepted Answer

The debt or security class at which value breaks — below which claims receive less than par

Answer

The fulcrum security is the tranche in the capital structure at which enterprise value is exhausted, meaning holders above receive full recovery while holders below receive partial or no recovery.

Question 4

What does 'par' mean in the context of distressed debt trading?

Accepted Answer

The face value of the debt instrument at 100 cents on the dollar

Answer

Par refers to 100 cents on the dollar — the face value of a debt instrument; distressed debt trades below par (at a discount), while performing debt trades at or above par.

Question 5

What is the 'loan-to-value' (LTV) ratio used to assess in distressed situations?

Accepted Answer

How much debt a company carries relative to the value of the assets or business securing it

Answer

LTV compares the outstanding debt to the collateral or enterprise value securing it, indicating how well-covered the lender is and how much equity cushion (if any) exists.

TMA - Turnaround Management Association Practice Test

TMA - Turnaround Management Association Practice Test

TMA Valuation in Distressed Situations 2