RX Case Study - Help on S&U and Capital Structure

To tackle this RX case study, let's break it down step by step based on the most helpful WSO content:

1. Pre-Transaction Capital Structure

• Secured Claims: $100M
• Priority Claims: $325M
• Unsecured Claims: $4B
• Transaction Fees: $20M
• Total Debt: $4.425B

2. Restructuring Plan

• New Facilities:
  • $200M Opco Facility (used to pay secured claims and transaction fees, leaving $80M cash on the balance sheet).
  • $2.25B HoldCo Facility (allocated between priority and unsecured claims).
• Creditor Treatment:
  • Secured Claims ($100M): Paid in full with cash from the Opco Facility.
  • Priority Claims ($325M): Receive 42% of the HoldCo Facility ($945M) and 42% of ordinary shares.
  • Unsecured Claims ($4B): Receive 58% of the HoldCo Facility ($1.305B) and 58% of ordinary shares.

3. Sources and Uses (S&U)

The S&U table is a critical step to ensure all cash flows and allocations are accounted for. Here's how it looks:

Sources:

• Opco Facility: $200M
• HoldCo Facility: $2.25B
• Total Sources: $2.45B

Uses:

• Repayment of Secured Claims: $100M
• Transaction Fees: $20M
• Allocation to Priority Claims (42% of HoldCo Facility): $945M
• Allocation to Unsecured Claims (58% of HoldCo Facility): $1.305B
• Total Uses: $2.45B

4. Post-Transaction Capital Structure

After the restructuring, the capital structure will look like this:

Debt:

• Opco Facility: $200M
• HoldCo Facility: $2.25B (split between priority and unsecured claims).

Equity:

• Ordinary Shares: Allocated 42% to priority claims and 58% to unsecured claims.

Cash on Balance Sheet:

• $80M (remaining from the Opco Facility after paying secured claims and transaction fees).

5. Addressing Your Concern

You mentioned that 42% of the $2.25B HoldCo Facility seems too high for $325M of priority claims. Here's why it makes sense:

• The allocation of the HoldCo Facility is not based on the absolute size of the claims but rather on the agreed-upon restructuring terms. In this case, priority claims are receiving a disproportionately higher share (42%) relative to their claim size ($325M) because they likely have stronger legal standing or seniority in the capital structure.
• Unsecured claims, despite being much larger ($4B), are receiving 58% of the HoldCo Facility, which reflects their junior position in the capital structure.

This type of allocation is common in RX scenarios, where negotiations determine the split based on recovery expectations, legal priorities, and bargaining power.

6. Key Takeaways

• Waterfall Analysis: Always start by understanding the capital structure hierarchy (secured, priority, unsecured) and how recoveries are distributed.
• S&U Table: Ensure all sources (new facilities) and uses (debt repayment, fees, allocations) balance.
• Post-Transaction Structure: Clearly outline the new debt, equity, and cash positions.

If you're still struggling, focus on building a simple model that tracks the flow of funds from sources to uses and ties it to the post-transaction structure.

Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Got this task during an Private Equity internship interview, how to handle it?, https://www.wallstreetoasis.com/forum/hedge-fund/qa-credit-analyst-at-5b-distressed-shop?customgpt=1, Week 3 of IBD Internship: The Pitch