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Are you discovering debt restructuring has more than its fair share of jargon? AMT Training has comprised the following jargon busting definitions to help.

 

Administration

A UK term (similar to the US Chapter 11) where a company is protected from its creditors allowing operational restructuring to take place. An ‘Administrator’ is appointed (unlike the chapter 11 process) to manage the company’s affairs and protect the interests of the company’s creditors.

 

Pre-pack administration

A UK term where a company is immediately sold in a pre-arranged process as it enters administration. Creditors do not have the opportunity to vote against the sale.

 

Liquidation

Where a company’s assets are sold, the liabilities are paid as far as possible and the company is wound up.

 

Chapter 11

Similar to the UK’s administration. The operational business is protected from the creditors to allow restructuring to take place (and in some cases additional working capital financing to be lent–ahead of the existing creditors). Interested creditors have to vote for the restructuring plan as well as being approved by the courts.

 

Chapter 7

 Similar to liquidation in the UK, where the company’s assets are sold and the business is wound up.

 

Pari passu

Meaning equal without preference, pari passu is used in loan contracts and creditor agreements where claims of a certain class of creditors are all equal and will receive a pro-rata share of the proceeds if the company is liquidated or sold below the value of their liabilities. Term A,B and C loans are usually pari passu.

 

Debt for equity swap

Where some of the creditors’ loans are converted into equity. If the business is a going concern, but cannot support its capital structure then the liabilities must be reduced. Generally the creditors will end up with more money if they swap some or all of their claims into equity compared to liquidation.

 

Bond holder haircuts

Where the bond holders agree to a percentage reduction in their claim–with the remainder converted to equity–similar to a partial debt for equity swap.

 

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