Question

Elixir Corporation has just filed for bankruptcy. Elixir is a holding company whose assets consist of real estate worth $240 million and 100% of the equity of its two operating subsidiaries. It is financed partly by equity and partly by an issue of $560 million of senior collateral trust bonds that are just about to mature. Subsidiary A has issued directly $480 million of debentures and $31 million of preferred stock. Subsidiary B has issued $260 million of senior debentures and $140 million of subordinated debentures. A’s assets have a market value of $580 million and B’s have a value of $316 million. How much will each security holder receive if the assets are sold and distributed strictly according to precedence?

Payoff: (I can't seem to figure out the correct amount for the trust bond)

a. Debenture = 480 million

b. Senior debenture = 260 million

c. Subordinated debenture = 56 millio

d. Trust bond= ?

e. Preferred stock = 31 million

Answer 1

Assets:

Real Estate = $ 240 million

Subsidiary A = $ 580 million

Subsidiary B = $ 316 million

Net Asset Value in case of liquidation = 240 + 580 + 316 = $ 1136 million

The preference of payments:

1. Senior Collateral Trust Bond

2. Senior Debenture

3. Senior Subordinated Debenture

4. Debenture

5. Preferred Stock

So out of $580 mn of A, $ 480 mn will go to debenture and $ 31 mn to the preferred stock.

Remaining of A = 580 - (480 + 31) = $ 69 mn

Out of $ 316 mn of B, 260 mn will go to senior debenture and rest 56 mn will go to subordinated debenture.

So we have remaining asset as = $ 240 mn + $ 69 mn = $ 309 mn

From these amount, the Collateral backed trust bond will get preferrence and receive $ 369 mn.

So the payments would be:

1. Senior Collateral Trust Bond: $ 369 million

2. Senior Debenture: $ 260 million

3. Debenture: $ 480 million

4. Subordinated Debenture: $ 56 million

5. Preferred Stock: $ 31 million