Building Restructuring Plan Models

When To Use

• Modeling a Chapter 11 plan of reorganization or out-of-court exchange offer
• Designing the emergence capital structure (debt/equity split post-restructuring)
• Analyzing creditor recovery waterfalls under competing plan proposals
• Evaluating debt-for-equity conversion ratios and new money injection terms
• Testing plan feasibility against projected cash flows and coverage covenants

Inputs To Gather

• Pre-petition capital structure: All tranches of debt (revolver, term loans, bonds, mezz, sub debt) with face values, accrued interest, maturity dates, coupon rates, and security/priority
• Claims register or estimated claims: Administrative claims, priority claims, secured claims, unsecured claims, intercompany claims, equity interests
• Enterprise valuation: Reorganization value (DCF, comparable company, precedent transactions) with low/mid/high range
• Projected financials: 3–5 year post-emergence revenue, EBITDA, capex, working capital, and free cash flow projections
• Plan term sheet: Proposed treatment of each class — reinstatement, paydown, debt-for-equity swap, rights offering, new money terms
• New money details: DIP-to-exit conversion terms, rights offering size and backstop, exit facility commitments, fees
• Tax attributes: NOL carryforwards, Section 382 limitations, cancellation-of-debt income estimates [VERIFY against debtor's tax advisors]

Workflow

1. Map the pre-petition capital structure

   • List each tranche with principal, accrued/unpaid interest, applicable premiums, and priority ranking
   • Identify the fulcrum security (tranche where value breaks) based on enterprise valuation range
   • Calculate total allowed claims per class including make-whole or prepayment penalties [VERIFY claim allowance assumptions with counsel]

2. Build the recovery waterfall

   • Allocate reorganization value top-down by absolute priority: administrative → secured → unsecured → equity
   • For each class, compute recovery as percentage of allowed claim
   • Model alternative distributions if the plan proposes deviations from absolute priority (cramdown scenarios) [VERIFY cramdown requirements under Section 1129(b)]

3. Model debt-for-equity conversion

   • Define conversion mechanics: what percentage of new equity each converting class receives
   • Calculate implied equity value per share at emergence based on reorganization value minus new exit debt
   • Compute dilution from management incentive plan (MIP), typically 5–15% of emergence equity, with strike prices and vesting
   • Show pre- and post-dilution ownership tables for all stakeholder classes

4. Structure new money and exit facilities

   • Model rights offering: size, subscription price (discount to plan equity value), backstop commitment fee, and resulting pro forma ownership
   • Build exit facility assumptions: revolver size, term loan tranches, coupon (fixed vs. floating), amortization schedule, maturity
   • Calculate total emergence debt and resulting credit metrics: Total Debt/EBITDA, Net Debt/EBITDA, Interest Coverage, Fixed Charge Coverage
   • Benchmark emergence leverage against comparable restructurings in the sector

5. Run feasibility and sensitivity analysis

   • Project debt service (interest + mandatory amortization) against free cash flow for 3–5 years post-emergence
   • Test the "feasibility" standard: confirm the reorganized entity is not likely to require further restructuring [VERIFY Section 1129(a)(11) feasibility requirements]
   • Run sensitivities on enterprise value (±10–20%), EBITDA margins, revenue growth, and exit multiples
   • Show recovery sensitivity tables for each class across valuation scenarios

6. Compile plan comparison (if applicable)

   • If multiple competing plans, build side-by-side recovery comparison
   • Highlight key differences: implied equity value, creditor recoveries, governance terms, timeline to emergence
   • Flag which classes are impaired and expected to vote for/against each plan

Output

• Emergence capital structure summary: Table showing each tranche of exit debt and equity, with amounts, rates, maturities, and key terms
• Creditor recovery waterfall: Class-by-class recovery percentages at low/mid/high valuations
• Ownership table: Pro forma equity ownership at emergence — converting creditors, new money investors, MIP reserve, existing equity (if any recovery)
• Credit metrics dashboard: Emergence leverage, coverage ratios, and liquidity position
• Sensitivity tables: Recovery and leverage sensitivities across valuation and operating scenarios
• Feasibility check: Cash flow vs. debt service projection confirming plan viability

Quality Checks

• Confirm total distributed value (debt + equity + cash) equals reorganization value — no value leakage
• Verify recovery waterfall respects absolute priority unless cramdown is explicitly modeled and justified
• Cross-check emergence leverage against sector norms and lender underwriting thresholds (typically 3.0–5.0x Total Debt/EBITDA)
• Ensure MIP dilution is applied consistently across all ownership calculations
• Validate that rights offering proceeds plus exit facility commitments cover all cash-pay claims and emergence liquidity needs
• Confirm NOL/tax attribute treatment is flagged for specialist review [VERIFY Section 382 limitation calculations]
• Test that model balances: sources of funds (new debt + new equity + asset value) = uses of funds (claim payments + fees + cash to balance sheet)