- Absolute Priority Rule.
A rule under Chapter 11 that all senior claimants must be satisfied completely before more junior claimants receive anything.
- Anticipation Payments.
The practice of offering customers discounts for immediate payment.
- Bankruptcy.
A situation in which an individual or institution becomes insolvent and can no longer pay debts owed. Under U.S. law, there is involuntary and voluntary bankruptcy. In an involuntary bankruptcy, the court is petitioned by one or more creditors to have a debtor deemed insolvent. In a voluntary bankruptcy, the debtor petitions the court.
- Chapter 11.
An integrated business reorganization statute enacted under the Bankruptcy Reform Act of 1978 that grants to the debtor and creditors the flexibility to work out a plan of reorganization that will meet the interests of all parties.
- Cram Down.
A court can cram down a reorganization plan over the opposition of some creditor or shareholder classes if it considers the plan fair and equitable to all impaired classes.
- Cross Default Provision.
A provision in a credit agreement that defines as an event of default a default under another credit agreement.
- Debt Overhang Problem.
Difficulty in raising capital when at least some of the proceeds will be used to pay off existing creditors.
- Debtor-in-Possession Financing.
Lending to companies that already have filed for Chapter 11 protection.
- Drop Shipment.
The delivery of merchandise directly to a retailer rather than through a distributor.
- Dutch Auction.
An auction system in which the price of the item auctioned is gradually reduced until it elicits a responsive bid. In the case of a financial instrument, the organization conducting the auction would distribute stock to all bidders at the highest successful bid price.
- Financial Distress.
A situation in which cash flow is insufficient to cover current obligations.
- Fraudulent Conveyance.
A transfer of assets that works to the detriment of creditors.
- Free Rider Problem.
See Holdout Problem.
- Funds from Operations.
The most widely used real estate industry cash flow measure. It is calculated as net income from operating activities before the impact of depreciation and amortization of assets unique to real estate. Assets unique to real estate exclude items such as office equipment and cars.
- Holdout Problem (also known as Free Rider Problem).
Small debt holders have no incentive to exchange their debentures or other debt securities for more junior claims such as equity or other debt securities with lower principal or deferred payments. They have no effect on whether or not the exchange offer succeeds. If the offer does succeed, small debt holders retain their original claim while others bear the cost of the exchange offer.
- Impairment.
A class of creditors is impaired if its claims are not satisfied in full.
- Insolvency.
Often used as a synonym for financial distress. There are two types of insolvency: A firm with a flow-based insolvency is unable to meet current obligations. A firm with a stock-based insolvency has a negative economic net worth; the present value of its cash flows is less than its total obligations.
- Key Performance Indicators (KPIs).
The most important financial and nonfinancial indicators of a company’s performance.
- Liquidation.
Converting some or all of a company’s assets to cash and distributing the cash to claimants.
- Over-Advance.
A credit extension beyond the maximum borrowing base defined by the lender’s inventory- and receivables-based formula.
- Pari Passu.
Refers to credit claims that have equal financial footing.
- Prepackaged Bankruptcy.
A bankruptcy proceeding in which a reorganization plan has been negotiated in advance of the filing and agreed to by all or enough creditors that, if necessary, those classes not agreeing with the plan can be forced to accept it. Prepackaged bankruptcies are also used to eliminate the tax consequences of debt forgiveness. Except under bankruptcy, forgiveness of debt is treated as income for tax purposes. Under bankruptcy, however, forgiveness of debt results in a reduction of any tax-loss carryforwards.
- Private Financial Restructuring.
Negotiation of possible restructuring with debt holders prior to filing for Chapter 11 protection.
- Reorganization Plan.
A plan for settlement of claims under a Chapter 11 proceeding that is subject to the approval of all parties.
- Strip Financing.
The practice of investors holding more than one class of security, often including both debt and equity. Strip financing can help in negotiation among equity and debt holders in the event of financial distress.
- Workout.
A resolution of financial distress without resorting to the bankruptcy courts.