Priority Claims during Bankruptcy
I'm a bit curious about the pecking order of recoveries in a bankruptcy scenario. While the traditional creditor paybacks are pretty well known (collateral is used to pay off first lien secured and then second lien secured, excess money is used to pay off general obligation unsecured creditors), I'm more curious where in the pecking order certain claims end up. For example, in a bankruptcy case, where do leases rank - are they pari passu with unsecured debt? Are priority claims like unpaid wages and A/P above secured debt, and can the proceeds of collateral be used to pay off these priority claims ahead of the secured creditors?
In particular, I'm curious about how Accounts Payable, Unearned Revenue, and Leases rank in a cap structure. I assumed the priority structure looked like:
-
A/P
-
First Lien Secured
-
Second Lien Secured
-
Sub Debt + Leases + Unearned Revenue (all unsecured)
Am I looking at this the right way? Appreciate any feedback!
Hey Prospect in IB - Restr, I'm the WSO Monkey Bot and I am sad to say, but this thread is lonely, so thought I'd post in here to try and help out. Some potential topics that might help:
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I hope those threads give you a bit more insight.
Your general thoughts seem right.
Typically, the waterfall is like this
Typically not much left once you get to this point.
Now nothing is set in stone and things like unpaid wages, specific vendors who kept supporting the company during stress, etc they get shone horned ahead on unsecured.
Appreciate it - just one general question, where do leases typically rank within this structure? I assume unsecured? Thanks
There is no one size fits all in restructuring. For example, a bankruptcy judge can actually reject leases during the proceedings and the distressed company can walk away from those obligations.
Would clarify the above the not all AP will be admin priority claims, etc
Don't think the post above is entirely correct. For a firm that relies on operating or finance leases (al of which are now on balance sheet as part of accounting changes) as part of their business (e.g a logistics company that leases a bunch of their freight trucks and trains, or a construction firm that leases their heavy machinery), these rank as a secured claim. There’s an asset pool that can be asserted by the claim, as the lease liability sits on the balance sheet. Usually there arises a deficiency portion of the claim, where there is not enough value at the siloed entity which holds the lease, which is an unsecured claim that is counted in the general pool of unsecureds. But this depends on parent and adjacent subsidiary guarantees. Sometimes there's also a lease renegotiation or rejection as a result of the bankruptcy process and company prerogative, which creates another type of unsecured claim. I.e what is the value now lost to the lessor because the lessee isn’t paying that extra $100 over ten years etc.
Look up the absolute priority rule 1129b
Here's a quick overview I have of a payout and how value floats down.
Also, regarding leases ...
Executory Contracts: allows Debtor to reject certain contracts, i.e. leases
When the Debtor rejects a property lease (they have 60 days to reject non residential real estate leases) - the property owner can bring a claim against the Debtor which amounts to the greater of 1 years worth of rent or 15% of remaining term of the lease (max is 3-years worth).
So, in most Bankruptcy cases, we're talking about a reorganization, rather than a liquidation, so I'll operate on that assumption.
If a Debtor is reorganizing, it usually does one of the following with its leases: (a) have the lease ride through to the reorganized company unimpaired, (b) have the lease ride through to the reorganized company with more competitive terms, (c) reject the lease completely.
If the lease is rejected then it usually becomes part of the General Unsecured Claims pool.
A simplified priority waterfall for a Chapter 11 may look something like the following:
- Administrative Claims
- Super-Priority Debtor In Possession (DIP) Financing
- First Lien Secured Debt
- Second Lien Secured Debt
- Unsecured Claims (including unsecured notes and general unsecured claims)
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