Subordination Turnover in Chapter 11
Let's say we have two senior unsecured bonds with face values of 70 and 30. Then there are also bonds that are subordinated to the two senior bonds. If after handling all other claims in the waterfall, let's say we determine that the recovery (before any subordination turnover) of the subordinated bonds is X and the two senior bonds is Y_1 and Y_2, respectively (both Y_1 and Y_2 are less than the face values).
Now, when it comes to the subordination turnover, how is it allocated to Y_1 and Y_2? Is it just pro-rata 70/30 until one bond reaches par and then remainder goes to the other bond? Or, if one bond reaches par before getting its full pro-rata share of the turnover, does the residual amount of turnover go back to the subordinated bond? Could there be any more contractual or structural nuance that screws this simple allocation? Any carve-outs or exceptions to look out for?
Thank you!
Pretty confusing setup, partly because of wording. Do you have this situation in mind?
There are 6 senior unsecured bonds, 3 of them are subordinated to Y_1 and Y_2. Once you go through the waterfall (not much of a waterfall), each gets 1/6, and Y_1 and Y_2 are entitled to the portions of recoveries of the subordinated bonds. Let’s say that there isn’t enough to cover, then they will be sharing those proceeds pro-rata, which means that they will get the same % among them (so the 70 claim gets 35 while the 30 claim gets 15). The three subordinated bonds get 0, and the last unsubbordinated bond gets the same recovery when you divided the pie by 6.
If all the bonds are subordinated to Y_1 and Y_2 then I’m not sure what you mean when you say “recovery X” after the waterfall— the other bonds are just junior to these two, so they’ll be second in line in the waterfall.
It’s all about percentage recovery, not equal money recovery, so no need to think about the face values in this theoretical example.
standard mechanic:
if both senior bonds are pari passu, the turnover from the sub notes flows up pro-rata based on claim size (70/30 split).
it does not stop until both senior bonds are "made whole" (100 cents on the dollar). the sub bond gets nothing back until the seniors are fully satisfied.
the nuance that kills you:
go to the indenture of the subordinated notes and find the definition of "Senior Indebtedness".
does it explicitly include both of your senior bonds?
sometimes it restricts the turnover benefit only to "Designated Senior Debt" (usually bank debt) and excludes trade claims or specific bond tranches.
if bond B (the 30) isn't in that definition, bond A (the 70) might hog the entire turnover.
don't assume; read the definitions
Dolor maiores sit et voluptas aut officiis consequatur sequi. Doloribus autem veniam sit occaecati. Aut vel aut harum incidunt magni corrupti quaerat. Expedita voluptatem magnam quibusdam id qui soluta. Iure ad et dolore. Accusamus quibusdam occaecati nemo dolores dolorem. Sed magni sunt dolores qui.
Suscipit nostrum quaerat saepe nostrum. Quia illo et eos nam fugiat nam minima. Consectetur numquam facilis excepturi labore et voluptatibus eos.
Possimus optio aliquid maxime dicta. Culpa aut repellendus corrupti quidem. Repellat omnis in minus possimus saepe.
Velit rerum enim debitis aut perferendis reiciendis ut. Doloremque aliquid iste dolores. Nobis sit enim blanditiis autem et similique ab. Aspernatur ullam facilis aspernatur odio architecto dolorem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...