hard · Corporate Credit Analysis
An issuer's bonds trade at a $620m enterprise value implied by the market. Its capital structure (by priority) is: $300m first-lien term loan, $400m second-lien notes, and $250m senior unsecured notes.
Using a simple structural/waterfall lens with the market EV as the distributable value, which statement about the second-lien notes is correct?
- The second-lien notes are the fulcrum security: value covers the first lien ($300m) fully and leaves $320m for the $400m second lien, so the second lien recovers 80% and the unsecured tranche recovers nothing
- The second-lien notes recover 100% because $620m comfortably exceeds the combined $300m first-lien claim, and any shortfall is borne entirely by the junior unsecured holders below them
- The second-lien notes are the fulcrum security, recovering about 64%, computed as the $400m second lien's share of the $650m secured debt applied to the $620m available EV
- The second-lien notes recover 45%, because the $620m EV is split pro rata across all $950m of debt, giving the second lien $400m/$950m of the distributable value
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