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Corporate And Capital Structures Notes

Law Notes > Debt Restructuring Notes

This is an extract of our Corporate And Capital Structures document, which we sell as part of our Debt Restructuring Notes collection written by the top tier of King's College London students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Debt Restructuring Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Corporate and Capital Structures:
● Balance Sheet:
Real Assets

Claims on Assets


Debt (loans, bonds, notes, etc.)


Equity (common stock, preferred stock,

○ The restructuring generally occurs on the left hand side of the balance sheet.
■ E.g. Renegotiating interest payments on debt.
○ It may also occur on the right hand side, although this is ancillary, and the principal focus is still on the left hand side.
■ E.g. Divestment of irrelevant assets.
● E.g. Single project financed by a loan of 200:
Firm Value

Debt Value

Equity Value

0 0

0 50

50 0

100 100

0 150

150 0

200 200

0 250

200 50

300 200

100 350

200 150





200 X - 200

○ This is because equity is subordinate to debt.
○ Equity = Residual claim
● E.g. Single-project firm, to be liquidated after 1 year. Start-up costs = 10,000, of which 5,000 is debt.
○ 2,000 in a secured loan, with 5% interest rate.
○ 1,000 in senior unsecured subordinated notes, with 7.5% interest rate.
○ 2,000 in unsecured convertible debenture, with 3.5% interest rate.
○ 3 common shares. ○ Why the different interest rates?
■ Higher interest rate = Riskers; Lower interest rate = Safer.
■ Secured loan = Safest = 5% interest rate
■ Unsecured + Subordinated note = Riskiest = 7.5% interest rate
■ Convertible = Ability to share in the potential upsides by converting into equity if the company does well = Need to pay for this advantage
= 3.5% interest rate
○ How much money will be owed to each class at the end of the year?
■ 2,000 x 105% = 2,100
■ 1,000 x 107.5% = 1,075
■ 2,000 x 103.5% = 2,070
○ How much cash flow does the firm need to generate in order to be solvent?
■ 2,100 + 1,075 + 2,070 = 5,245
■ Cash flow solvency = Ability to pay one's debt as they fall due.
■ Balance sheet solvency = The nominal value of one's assets must be equal or greater than the nominal value of one's debts.
○ At what firm value does it become profitable to convert the debenture into equity?
■ After conversion = 3 + 1 = 4 shares
■ 4 x 2,070 per share = 8,280. This is because each share must be worth more than 2,070 in order for it to be profitable to convert
■ 8,280 + 2,100 + 1,075 = 11,455
PE-led LBOs: ● Re McCarthy & Stone plc:

○ They were in the business of retirement accommodation.
○ M&S plc was the entity that was publicly traded on the LSE. All outstanding shares in M&S plc was acquired by BidCo and delisted.
○ The assets of M&S plc are held by a subsidiary, M&S (D) Ltd.
○ M&S (D) Ltd holds the shares of the other subsidiaries further down in the corporate chain.
○ BidCo acted as the borrower in the acquisition financing.
■ Facilities A, B, and C: Senior term loans.
First-ranking security over certain assets, second-ranking security over other assets. Guaranteed by other group companies.
■ Facility D: Senior property revolving credit facility.
First-ranking security over assets over which ABC rank second, and second-ranking security over assets over which ABC rank first.
■ Facility E: Senior working capital revolving credit facility. Pro rata loss sharing agreement with ABC.
■ Facility F: Second lien facility.
■ Mezzanine facility.
■ Investor loan notes. These were structurally subordinated and held by an entity higher up in the corporate chain.
■ Numerous layers of debt, and complex interactions between different layers.

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