RX & Distressed Concepts

Question 1

What are the 4 types of subordination?

Answer 1

• Collateral
• Contractual
• Temporal
• Structural

Question 2

What is collateral subordination?

Answer 2

• debt secured by collateral
• secured creditors must be paid in full before the proceeds of collateral can be used to satisfy junior secured or unsecured claims

Question 3

Considerations for finding collateral subordination issues in a debt document

Answer 3

• how much secured debt the issuer is permitted to incur

- the extent to which that debt can be secured on a first lien (priming), pari or junior lien basis

Question 4

What is contractual subordination?

Answer 4

• when specific senior debt has payment priority over sub debt
• payment priority affects the priority of a creditor’s right to any repayment

Question 5

What is temporal subordination?

Answer 5

• effective priority of earlier-maturing debt over later-maturing debt

Question 6

What is structural subordination?

Answer 6

• when direct creditors of a non-guarantor sub have a higher priority claim at the sub level relative to direct creditors of the non-guarantor sub’s parent

Question 7

Ways to protect from structural subordination

Answer 7

• subsidiary guarantees
• limits on transfer to non-guarantor subsidiaries: restrictions on investments, loans or asset sales to non-guarantor subs
• limits on debt incurrence by non-guarantor subs

Question 8

What is substantive consolidation?

Answer 8

• It is a doctrine that permits the bankruptcy court, under certain circumstances, to disregard distinctions between parent companies, subs and affiliates that operate together as a group (substantive consolidation is rare)

Question 9

What is a fraudulent conveyance?

Answer 9

• a transfer of the debtor’s assets to a third party, with the intent of preventing creditor’s from reaching the assets to satisfy their claims

Question 10

What are the two types of fraudulent conveyance and explain them?

Answer 10

• Actual Fraud: intent to defraud the creditors
• Constructive Fraud: transfer which is made for grossly inadequate consideration
  2 Conditions for Constructive Fraud:
  1 - debtor received less than “reasonably equivalent value”
  2 - debtor unable to pay debts at time transfer was made or as a result of transfer itself