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Opinion

Debt restructuring: Value judgement

The shocking disparity in distressed corporate valuations might serve to embolden junior claims on these companies.

The resolution of an acrimonious restructuring dispute in September has again raised the issue of the rights of junior lenders in the workout process.

Mezzanine lenders to German specialist alumina producer Almatis eventually succeeded in persuading management against a senior lender-backed restructuring (that would have seen them wiped out) by convincing them that the company was worth more than the senior lenders claimed. The result is in stark contrast to the outcome of the IMO CarWash dispute in Europe last year where senior lenders saw off a challenge from mezzanine funds, which – together with sponsor Carlyle Group – lost their money.

The IMO CarWash decision seemed to demonstrate the likely extremely weak position of junior lenders in this downturn as companies are simply so overlevered that value will never break in the mezz tranches. Success or failure in restructuring disputes largely hangs on convincing the judge of where value breaks in the capital stack: senior lenders want value to break in the senior debt, thereby dismissing any claims of junior parties, and subordinated lenders need to prove that value breaks within their tranches to give them a claim. The valuations produced by opposing sides unsurprisingly vary substantially given the motivations of the parties that commission them.

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