hard · Corporate Credit Analysis distressed

Under the prevailing formula approach for valuing deferred cash payments to a secured creditor, which factor would a court LEAST appropriately use to build up from the risk-free base, and why?

1. The reorganized debtor's projected probability of plan default, because a higher feasibility risk profile should raise the discount rate applied so as to preserve the present value of the secured claim
2. The quality and loan-to-value coverage of the collateral securing the replacement note, because materially weaker collateral coverage warrants a substantially larger risk premium to offset potential shortfall exposure
3. The duration of the plan's repayment period, because a meaningfully longer deferral horizon increases the cumulative exposure to the debtor's ongoing credit deterioration and reorganization execution risk over time
4. The lender's own cost of obtaining replacement exit financing in the open market, because a competitive market rate including lender profit and transaction costs is the correct benchmark for the cramdown rate

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