Waterfall question - note secured by only one asset?
Say a company has two assets and issues two notes - one note secured by one asset and the other note unsecured. If both assets were liquidated, would proceeds from the asset that didn't secure anything go to the secured bondholders before flowing down to the unsecured bondholders or would the liquidation value of that asset be split evenly between both tranches? Or is it required that some kind of seniority between tranches be specified?
Secured creditors are secured only up to the value of their collateral. Let's say there are two $300m bond issues and the company has two assets that are each now worth $200m. One bond is secured by one of the assets, the other asset is unencumbered. The secured creditor would first receive $200m from the value of their collateral. They would then have a $100m deficiency claim that is unsecured and sits pari with the unsecured bond. So there is now $400m in the unsecured claims pool (25% to the secured creditor and 75% to unsecureds). The value of the second asset is then divided pro rata so $50m goes to secureds and $150m to the unsecureds.
Final secured recovery would be (200+25)/300 = 75c. Unsecured recovery is 150/300 = 50c.
Amazing answer, thanks so much - is there a resource I could check out that talks about the exact mechanism of these kinds of cap structure questions? I couldn't find anything great online; maybe I'll look for a copy of Moyer
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