You have $100mm EBITDA; EV 12x EBITDA;
$500mm first lien debt; $600mm second lien debt; $200mm unsecured debt;
How much is each tranche of debt trading at?
I believe I was also asked about calculating equity value after calculating what each tranche of debt is trading at, but truly don't remember exactly. If this sounds right, I'd love some help on this as well. Thank you!
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Not 100% sure but I believe 1st lien and 2nd lien are trading at par noting full recovery while unsecured would be trading near $0.50 (maybe slightly above given ant ascribed value to equity in the reorg'd company).
Enterprise value of $1200 less $1100 for the secured creditors leaves $100 left for the unsecured creditors. $100/200 = $0.50.
I work in valuations. Realistically, the 1L and 2L would be trading below par given the distressed nature of the company. However, this question is assuming you will value this using the recovery method.
1L and 2L combined is 1.1M compared to the 1.2MM EV. Therefore it will trade at par.
The remaining TEV to the unsecured debt is 100M / 200M unsecured outstanding = 50% recovery
Whoops didn’t realize you already answered my b
I agree with all the above comments but disagree with the third part, considering you were asked where debt is trading at.
$100mm EBITDA * 12x Multiple = 1,200 EV distributable
1) First lien gets full recovery, trading at par (1,200-500)
2) Second lien also gets full recovery, trading at par (700-600)
3) Unsecured debt is likely trading slightly above 50 cents on the dollar because of embedded optionality. I think with these types of question, it depends on whether or not you're asked specifically what the debt is trading at versus what the recovery value would be. If you were asked about recovery, that would be relatively straightforward (100/200 = 50%) which is what the above comments touched on.
In terms of residual equity, because there isn't any equity left over, my best guess is that equity value would be zero.
This isn't right ^. The uns would probably trade well below 50 cents (because they have capped upside) while equity could theoretically still have some option value (because it has unlimited upside). Taking a step back, I'd look at this a little bit differently than the other posters here.
First of all, when we talk about "trading levels", these are security prices which -- at a given coupon and a given maturity date -- will result in a "yield to maturity". Just because there is minimal risk of default, you can't assume a security trades "at par" (example: I bought some 2050 apple bonds that now trade at like 65 cents on the dollar because their coupon is 3% and the market has bid/sold these bonds to a yield of ~5.5%, or just above the risk free rate). So the basis of the question is fundamentally flawed.
Next, you have three securities that "detach" at ~40%, ~91%, and ~108% LTV respectively. The second lien would trade well below par with an LTV approaching 100% (or said otherwise, if it were 100% LTV, it should trade down until it is priced like equity). Recall how loans have assymetric upside/downside? No lender is holding a 2L at 91% withouth meaningful price discount.
Finally, to correct a poster above, if the expected recovery of the unsecured notes is 50%, they will trade well BELOW 50 cents, not above, since most scenarios that involve lenders taking haircuts almost certainly also involve a hundred million dollars of value destruction through bankruptcy admin claims. Also, your upside equals your downside in that case, which is just poor asset management. If I told you you had a 50/50 chance of getting $1 or $0, how much would you pay me? No good investor would pay 50 cents, since that would just be breaking even..
Agreed, a re-run with 5% professional fees brings down recovery to $0.20. I also believe the secured lenders are entitled to post-petition interest to the extent they are over-secured. The unsecured lender doesn't get this, so essentially you'd need to discount for that as well and the TVM between when you finally get paid. So for the $50 recovery above, I'd imagine if it were going to take two years to wind through the bankruptcy process and before you got paid, you might discount it at 10% for two years. Or, $50/(1.10^2) = $41.32
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For interview purposes its just 50 cents on the dollar - literally the most straight forward waterfall question you can get with no curve balls on structural subordination or specific collateral involved in the Q
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