hard · Corporate Credit Analysis
A holding company (HoldCo) issues $400m of structurally subordinated unsecured notes; its sole asset is the equity of an operating subsidiary (OpCo) that has $600m of senior unsecured debt and $1,000m of asset value in a default. Both entities file simultaneously.
Ignoring intercompany claims, taxes, and admin costs, what is the recovery to HoldCo noteholders under absolute priority?
- $0, because OpCo creditors are satisfied in full from the $1,000m before any value flows up to HoldCo, leaving $400m of residual equity that exactly covers the notes
- $400m (par), because the HoldCo notes are senior unsecured at HoldCo and the $1,000m of OpCo assets exceeds the combined $1,000m of debt
- $400m (par), because the $400m residual equity value at OpCo flows up to HoldCo and is exactly sufficient to repay the notes in full
- $240m, a 60% recovery, because HoldCo notes share the $600m shortfall pro rata with OpCo's senior unsecured creditors as unsecured claims of the consolidated estate
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