hard · Investment Banking rx-dcm-ecm
A company executes an out-of-court exchange offer: holders of $400M face of unsecured notes trading at 45 cents are offered new SECOND-LIEN notes at a 70% exchange ratio (i.e., $280M new face). 80% of holders tender. The new second-lien debt is junior only to an existing $250M first-lien revolver.
From the perspective of a NON-tendering ('holdout') noteholder, which statement best captures why this exchange is typically coercive — and what limits that coercion?
- Holdouts keep their original face and contractual priority, but the exchange primes them structurally by layering new second-lien debt ahead of their now-effectively-subordinated unsecured claim, while remaining capped by the lien-subordination covenant capacity
- Holdouts are forced to accept the 70% ratio once a two-thirds majority tenders, because the exchange amends the indenture's payment terms via a binding majority vote
- Holdouts benefit because the $120M of face reduction deleverages the company and lifts the recovery value of their unimpaired unsecured claim above 45 cents
- Holdouts are unaffected in priority since liens cannot be granted without unanimous consent, so the exchange is purely a voluntary haircut with no coercive effect
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