Financial Restructuring and Bankruptcy

The whole unit on one sheet: the priority waterfall, loan covenants, Chapter 11 machinery, plan-vote math, and M&A registration.

Which One-Liners Win Points?

• Waterfall, high to low: DIP (super-priority), admin expenses, senior secured, junior secured, senior unsecured, subordinated, mezzanine/convertible, preferred, common.
• APR: each rank paid in full before the next; pro rata within a rank; enforced at confirmation in cramdown. Equity is wiped before junior debt is impaired; old equity keeps a stake only via a "new value" contribution.
• Trade suppliers = senior UNSECURED, ahead of subordinated/mezzanine, behind secured. Priority unsecured claims (domestic-support, capped wages, taxes) rank above general unsecured; an undersecured claim splits, shortfall becoming a deficiency claim. Mezzanine = DEBT, NOT equity: above preferred/common, below senior.
• Maintenance covenants trip quarterly, automatically; incurrence covenants trip only on a prohibited action. Filing = AUTOMATIC default, no grace period; automatic stay starts instantly, no court order. DIP runs the business by default; a trustee only for fraud, dishonesty, or gross mismanagement.
• Class acceptance = 2/3 AMOUNT AND over 1/2 NUMBER of holders; both prongs must clear. Merger-vote-as-sale TRIGGERS Form S-4 for stock deals (not an exemption); all-cash: none.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

• DIP super-priority/admin expenses are POST-petition, above pre-petition secured creditors; a priming lien (Tier 4) can outrank them, only with adequate protection (DIMINUTION coverage only; failure grants stay relief) AND no other credit. The U.S. Trustee is NOT a Chapter 11 trustee (it supervises cases); a Chapter 11 trustee is rare and cause-based.
• Best interests is HOLDER-by-holder: every holder must get at least Chapter 7 liquidation value, even if the class accepts; paid in full can still be IMPAIRED (a rights question, not recovery). Cramdown needs impairment, one impaired NON-INSIDER class accepting, fair-and-equitable, no unfair discrimination; no accepting class means none.
• Cross-default trips on any default; cross-acceleration only when accelerated (borrower-friendlier); change of control is usually a PUT, not default. Make-whole = net present value (NPV) of remaining interest at a Treasury rate plus spread (a discounted swap can generate CODI, cancellation-of-indebtedness income); "free and clear" liens shift to sale proceeds.

How Do Loan Documents, Chapter 11, and M&A Registration Work?

• Credit agreement: private bank loan, ACTIVE agent, floating rate, easier to amend. Indenture: public bond, PASSIVE trustee, mostly incurrence covenants, fixed coupon, hard to amend; under the Trust Indenture Act of 1939. Amortizing (term loan A) repays on schedule; bullet (term loan B, high-yield) repays mostly at maturity.

• Leverage (Debt / EBITDA, earnings before interest, taxes, depreciation, amortization) is CAPPED; coverage is FLOORED. Negative covenants restrict debt, liens, payments, asset sales; proceeds are typically trapped.

• Automatic stay halts collections, lawsuits, foreclosures, lien enforcement; relief needs court-shown cause. DIP tiers: 1-2 unsecured (no approval, then notice/hearing); 3 super-priority/junior liens (no Tier 1-2 credit); 4 priming lien over secured lenders (no other credit, adequate protection).

• Plan sequence: disclosure statement ("adequate information") FIRST, voting, then a SEPARATE hearing (good faith, paid-in-full admin expenses, an accepting impaired class, best-interests, feasibility). Rejecting SECURED (pick one): retain liens plus deferred payments (claim value); sell free and clear, liens to proceeds; or "indubitable equivalent." Rejecting UNSECURED: pay in full, or no junior gets anything (APR standard).

• Three flavors: prepackaged (pre-filing vote), prearranged (restructuring support agreement, votes after), free fall (post-filing). Going-concern sale: "free and clear" if one of five statutory conditions is met, via a stalking-horse auction; FASTER than confirmation (skips disclosure, voting, hearing).

• Same-issuer exemption: issuer swaps securities with EXISTING holders. Bankruptcy-plan exemption: securities under a CONFIRMED plan, for a pre-petition/admin claim, are exempt, FREELY TRADEABLE by non-affiliates (new pre-confirmation money doesn't qualify). Form S-4 registers acquirer shares to target stockholders, doubling as a proxy/prospectus.

• Three communications rules: merger-vote-as-sale TRIGGERS registration; a pre-filing safe harbor allows early communication; same-day EDGAR filing is the price (anti-fraud applies).

• Regulation M-A is a disclosure OVERLAY pulled into Schedule TO, 14D-9, 13E-3, S-4, 14A (Item 1001 = summary term sheet; Items 1013-1014 going-private). Schedule 14A Item 14 (M&A carve-out): a stock merger satisfies it via Form S-4 info; all-cash needs less disclosure.

One-Breath Recap

Distress flows down a priority waterfall, enforced at cramdown by the Absolute Priority Rule: DIP financing and admin expenses sit on top, secured beats unsecured, mezzanine sits near the bottom, and equity is wiped before junior debt is impaired. Chapter 11 keeps the debtor in possession under an automatic stay; a plan confirms after a disclosure statement and a two-thirds-amount, over-half-number vote, or cramdown. Faster paths: a prepackaged case, a going-concern sale, or an out-of-court exchange (holdouts can sink one). The merger-vote-as-sale rule triggers Form S-4 under the Regulation M-A / Schedule 14A overlay.

Need more than the recap? Read the full Financial Restructuring and Bankruptcy unit.