medium · Corporate Credit Analysis distressed
An issuer, Horizon Corp, is considering a 'Distressed Exchange' where bondholders are offered 75 cents on the dollar in new, higher-ranking secured debt for their current senior unsecured notes (trading at 60 cents).
Why would a rating agency likely classify this as a default?
- Rating agencies only classify exchanges as default if the new security trades below the current market price of 60 cents.
- The exchange is only a default if it is involuntary and mandated by a bankruptcy court.
- The offer constitutes a 'forced loss' where the creditor receives less than the original contractual promise.
- Any exchange of unsecured debt for secured debt is an automatic technical default under the pari passu clause.
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