Laatste dingen

Question 1

What is good about the automatic stay clause?

Answer 1

The firm ended up in bankruptcy ‘by surprise’ due to
financing reasons (not, because their business model is faulty). The automatic stay rule enables the
firm to halt all immediate claims by the large number of creditors. This allows for additional time to
get all creditors to agree on a restructuring plan that might ultimately benefit the creditors by
preserving the asset value of the firm. Without the automatic stay rule, single creditors might just try
to collect their claims which would jeopardize the restructuring

Question 2

If the bond price is lower what does this mean for the YTM:?

Answer 2

HIgher, always metnion this in the answers

Question 3

What are the main advantages and takeaways of credit ratings?

Answer 3

• Credit ratings are also available for firms who do not have public equity Due to the
• rating-through-the-cycle approach of credit rating agencies, credit ratings can remain stale for long
• periods of times. However, when a firm approaches default, credit ratings can change very rapidly.
• Therefore, credit ratings are more suited for a portfolio approach/long-term investors, but not for
• short-term investments. Defaults are rather rare events. In terms of data, a trade-off exists between
• having a sufficiently large sample size and having a sample that is comparable.

Question 4

Technical insolvency

Answer 4

unable to meet debt as they come due

Question 5

Technical default

Answer 5

Borrower violates a provision other than a scheudled payment

Question 6

formal default

Answer 6

borrower misses interest or principle payment

Question 7

continuous random variable

Answer 7

Stock returnsD

Question 8

discrete random variable

Answer 8

THrowing a dice

Question 9

distressed exchange

Answer 9

exchange eisting debt for new debt or equity securities
- Absolute priority rule: Principle in bankrtupcy proceedings that determines the order in which creditors and shareholders are paid

Question 10

• Debtor in possession financing (DIP).

Answer 10

Type of financing provided to companies that have filed for bankruptcy, super senior.

Question 11

• Out of court restructuring

Answer 11

Restructuring out of court mostly done via an distressed exchange

Question 12

One share one vote clause?

Answer 12

do not have different stock classes, everyone who owns a fraction of the company can vote in proportion to their ownership

Question 13

• proxy by mail

Answer 13

dummy variable 1 If you are allowed to vote via mail (higher influence as a minority shareholder)

Question 14

• shares not blocked before meeting

Answer 14

Shares can be traded freely leading up to a meeting (beneficial for minority shareholders)

Question 15

• cumulative voting

Answer 15

minority investors can vote on one candidate that represents them in e.g. BOD

Question 16

• oppressed minority

Answer 16

you can challenge director decisions in a court, or have additional rights for equity buyback in case the management is doing something unlawful

Question 17

• preemptive right to issues

Answer 17

the incumbent large shareholders cannot simply issue a new stock class at preferential rates for themselves

Question 18

Where are minority shareholders better protected common or civil law

Answer 18

minority shareholders have a higher level of protection then in civil law countries

Question 19

• Direct financial distress costs

Answer 19

Lawyers, accountants, restructuring advisors, turnaroundspecialists, court-fees.

Question 20

Indirect Financial Distress costs:

Answer 20

• Loss in customer base
• Higher debt costs
• Worse supplier terms
• Loss of key employees
• Resources bound for restructuring
• Indirect financial distress costs are hard to measure

Question 21

• Bargaining is key business in:

Answer 21

Mergers and acquisitions, Financing structures, supplier relations, customer trade deals, Financial distress.

Question 22

Negative debt covenants:

Answer 22

limits on dividend payments, no asses can be pledged to other lenders, mergers are not allowed, no additional debt issuance

Question 23

Positive debt covenants:

Answer 23

maintain working capital at x, access to period financing statements for lenders

Question 24

What types of strategic games are there?

Answer 24

• Static games (prisoner’s dilemma) → boing vs airbus, OPEC
• No enforceable solution → adjust your own strategy according to other people’s actions
• Repeated games (Cournot’s game) → market entry decisions
• No cooperation
• E.g. how to enter the market when new product is launched
• No enforceable solution → adjust your own strategy according to other people’s actions
• COOPERATIVE GAMES
• Here there is an enforceable solution
• Nash bargaining solution
• Shapley value
• → cooperative games include credible threat that enforces solution

Question 25

• Three investor types that invest in distressed securities:

Answer 25

Active Control: 1/3minimum control to block decisions, debt equity swap, equity infusion, restructure firm, exit two or three years later, target return 20-25%
Active non-control: Senior Secured or unsecured debt position, con control, active participation in restructuring process, exit via debt or equity, exit one or two years later, target return15-20%.
* Passive: Invest in undervalued securities trading at distressed levels, strategies: buy-and-hold, capital structure arbitrage, exit six months to one year later, target returns 12-20%.

Question 26

Problems with using credit ratings?

Answer 26

Difficulties in estimating PD and LGD based on credit ratings
- Similarity of data (recency, industry, size, etc) vs data scope (do you want the credit rating to be based on the closest match but than yhou have very limited data
- Credit ratings are subject to change
- trustworhiness of data (trading prices vc quotes/ prices based on legal documents)
-