A company in Chapter 11 is worth $600 million. Claims are a $50 million DIP, $10 million of admin claims, $300 million of first lien, $200 million of second lien, $150 million of unsecured bonds and $50 million of trade claims. Who recovers what?

Pay each class in full before the next, with the DIP and admin claims off the top. That leaves $40 million for $200 million of unsecured bonds and trade claims, 20 cents each, so the unsecured class is the fulcrum.

The numbers, step by step

The claims from the question, in $ millions, paid in order of priority from $600 of value, then the rerun at $450.

Left after the DIP and admin claims$600 − $50 − $10

$540

Left after the first lien$540 − $300

$240

Left after the second lien$240 − $200

$40

Unsecured recovery$40 ÷ ($150 + $50)

20 cents

Bonds' share$150 × 20%

$30

Trade claims' share$50 × 20%

$10

At $450, second lien recovery($450 − $60 − $300) ÷ $200

45 cents

At $450, second lien deficiency claim$200 − $90

$110

What the interviewer listens for

• Do you pay classes strictly in order of priority?
• Do you take the DIP and administrative claims off the top?
• Do you share the unsecured pool pro rata: 20 cents, $30 million and $10 million?
• Do you name the fulcrum?
• Do you rerun it at a different value?

Common mistakes

• Splitting value across every class pro rata instead of paying class by class from the top.
• Putting trade claims behind unsecured bonds.Without contractual subordination they rank equally.
• Paying the secured lenders before the DIP and administrative claims.
• Forgetting that an undersecured lender's shortfall becomes an unsecured deficiency claim.

Likely follow-ups

• What if there were also $100 million of subordinated notes?They sit behind the unsecured claims, so at $600 million they get nothing. They only start to recover once value passes $760 million.
• Where would the unsecured bonds trade if the market agreed with you?Somewhere below 20 cents, since 20 is the expected recovery and investors want a return for the time and risk until emergence.
• What if some trade creditors are critical vendors?The court may let the company pay their pre-filing claims early to keep supplies coming, which leaves less for the bonds.

More finance technicals

• What is DIP financing, and why would anyone lend to a bankrupt company?
• Why would a company try an out-of-court restructuring first?
• What signs tell you a company is heading for distress?
• What's the difference between Chapter 11 and Chapter 7?
• What is a 363 sale?

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