Bankruptcy and unsecured creditors
In a corporate bankruptcy, say liquidation, are there priorities for unsecured creditors? Suppose the Company has $5 BN in debt, mixed bank loans and bonds, all of them unsecured. Is there a difference how each unsecured creditor will be treated in a liquidation scenario?
Suppose unsecured creditor X is sitting below a subsidiary with all of the operating asset, while unsecured credit Y is sitting at another subsidiary that has NO operating assets. If both are unsecured and guaranteed by the parent company, is there a different treatment or claim to the assets?
Depends. But in your example, unless stated otherwise in the intercred, X would get a greater recovery.
I know that here is not nearly enough information to make a determination but why would consider a creditor of a subsidiary with operating assets gets less recovery than a creditor of a subsidiary without operating assets?
Because the entity with the assets would pay its own unsecured creditors first, then what is left goes to the equity holders of that entity (the holding co) to pay their unsecured debts.
Each subsidiary is a separate legal entity. Debts are owed by specific legal entities, not by whole corporate groups (this is complicated when you introduce guarantees to the picture, but let's ignore that for now). So, in the simplified case you outlined, Creditor X has a claim against one subsidiary (call it OpCo) and Creditor Y has a claim against another subsidiary (call it DormantCo).
OpCo has assets, so in a liquidation they are sold and the proceeds are use to repay as much of OpCo's debts as possible. If there are proceeds remaining after repaying all OpCo's debts, the residual is distributed to OpCo's shareholder(s).
DormantCo apparently has no assets, so in a liquidation its creditors get squat (why did they lend to that entity?).
However, if DormantCo is the holding company of OpCo (i.e. OpCo's shareholder), it receives the residual proceeds from the OpCo liquidation (to the extent there are any). DormantCo would only receive proceeds from OpCo's liquidation after all of OpCo's creditors have been repaid in full. Hence Oreo telling you X would get a greater recovery than Y. It is possible DormantCo's debts could also be repaid in full (in which case X and Y would both recover 100%). The residual proceeds from that liquidation would then be distributed to DormantCo's shareholders.
I actually misread Oreo's post and thought he said that unsecured creditors of DormantCo would get greater recovery than OpCo (assuming that they are both subsidiaries and DormantCo is not the holding Corp), hence the question I asked. Still I appreciate the crystal clear explanation you provided here. Thanks.
Has anyone seen a situation where there was no cross default or group guarantees but there were lock up covenants? How did it play out? admittedly this is an effed up structure, but still, curious.
i'd imagine people would just A&E it (e.g. PIK it since it has no cash flow, unless the parent wants to pay for it using cash generated elsewhere) 'til the maturity
What do you mean by lock up covenants?
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