medium · Private Credit portfolio-management-monitoring-workouts
In a Distressed Debt 'Loan-to-Own' strategy, an investor identifies a company with $250 million in Senior Secured Debt and $150 million in Senior Unsecured Debt. The investor determines that the Senior Unsecured Debt is the 'fulcrum security'.
What does this imply for the restructuring outcome?
- The Senior Secured Debt will be 'crammed down' to only a 50 percent recovery rate, even though fully covered by collateral value.
- The Senior Unsecured class will be paid in full (100% cash recovery) before any new reorganized equity is issued to any other party.
- The Senior Unsecured class is the most senior impaired tranche and will likely convert into the majority of the reorganized company's equity.
- The existing equity holders will retain a 20% stake as a negotiated contractual 'gift' from the senior creditors, despite being out of the money.
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