Help with 2 technicals
Can anyone please help me with the below, as I am not sure how to do them:
-You have a bond, 20 mil principal, the bond is retired at 50 cents on the dollar, assume a 20% tax, walk through 3 statements
-EV is 1 billion, operating company and holding company, assume 500MM sits at each, 500 unsecured at operating company, 750 secured sits at holding company, what are they trading at?
Thank you!
CFS = NI up 8, Non-cash gain from debt purchase so – 10, principal paid back = -10
Net cash went down -12
BS = Cash down 12, so assets down 12
Debt is down 20, RE is up 8, Net L+E is down 12
BS balances
2. i)If no guarantees exist
Holdco secured recovery 500/750 = 67%
Opco unsecured recovery is 500 = 100%
ii) Assuming backed/guaranteed by Opco
Opco EV = 500
Holdco EV = 500
Unsecured Opco = 500
Holdco secured = 750
Holdco secured gets 100% from Holdco up to 500 of 750
Rest 250 is unsecured pari with opco 500, so total debt shared with opco 750
500/750 = 67% recovery
Value of Holdco secured = 500 + 250 * 0.67 = 668
Value of opco unsecured = 500*0.67 = 335
(Can someone in rx confirm this)
Can you go more into depth on #2?
Why would pre tax go up if you are paying back a bond?
Whenever a company pays down it debt at a cost lower than the principal, it is considered a non-cash gain on the IS as the gain will create a tax expense.
Just curious, if the claim is secured would it not prime the unsecured recovery for the opco and recover at par? I know structurally if both claims were unsecured, then the opco has priority since the assets reside, but since holdco is secured, would this supersede?
HoldCo secured claim is secured presumably against HoldCo assets only, normally in this type of situation/question HoldCo has no assets so the 'secured' debt is secured against OpCo assets (which would thus make it senior).
+ since it's a structural subordination question, wouldn't be much point if the structural subordination didn't matter.
del
Disagree on #2 since there is no upstream guarantee - or at least OP hasn't said there is. UNLESS HoldCo secured is secured against OpCo assets (unlikely since in this case HoldCo appears to actually have assets - and in which case HoldCo would see full recovery anyway)
Situation as written by OP:
OpCo unsecured debt structurally senior to HoldCo, 100% recovery (500/500)
HoldCo debt 500/750 recovery, 66.6 cents on the dollar.
IF HoldCo had an upstream guarantee from OpCo:
HoldCo secured 500/750, undersecured portion (250) becomes general unsecured claim on OpCo, pari passu with OpCo unsecured debt, leading to further 133/250 recovery for HoldCo debt and only 367/500 for OpCo debt.
Total recovery: HoldCo debt 666/750, OpCo debt 333/500.
For where they are trading, add a little bit on top for 'optionality' (company hasn't filed Chapter 11 yet, etc. etc.)
- Aspiring RX nerd 3
Good point about the upstream guarantee, I know Rx interviews has a question just like this.
yeah there’s pretty much unlimited ways to interpret the second question and interviews will prolly be faced with multiple scenarios: upstream guarantees, liens, double dip structures, etc.
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