What is a "debt waterfall" in the context of RX?
Was reading that for RX interviews I should know waterfalls. Wanted to see what that is.
Does that just mean that I should have a solid grasp on capital structure? If so, any sources available?
Thanks
Hi TheAvenged, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:
You're welcome.
This is a matter of priority. At the simplest level, we have lien priority, which is typically contractual, and sets out how high or low a particular tranche of debt is in the capital structure. This determines what different debtholders are entitled to if the company collapses bases on the seniority of the loans. It's considered a waterfall because payments from the company go to first lien debtholders first, then other debtholders later, then equity holders.
We also have collateral priority, which may be distinct from the lien one. The debt could be secured to a particular asset, in which case it would be entitled to that collateral in priority of other generalised debtholders.
Finally we have structural priority, which is about subsidiaries. Essentially, subsidiaries should be treated as seperate companies entirely. They have their own set of creditors, which have priority over the creditors of the parent company. Only after all their claims have been settled, then the remainder is upstreamed to the parent as equity dividends, and that can be disbursed to the parents creditors.
This generally captures how it works, but to be clear, liens are on collateral. You shouldn’t separate them. If I’m first lien but my collateral is worth $0, then it’s effectively an unsecured claim.
Absolutely correct, but I was attempting to limit the confusion!
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