Interview Question

Investment Banking Summer Analyst Interview

-New York, NY

Greenhill & Co.

Assume a company has 500K of senior debt trading at 50%, and 250K of sub debt trading at 20%. Therefore, the market value of each is 250K and 40K, respectively. According to BIWS, this also means that creditors expect to recover 50% of the senior debt and 20% of the sub debt. Why is that so?

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2 Answers

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Explained how bankruptcy is expensive and how junior debt holders tend to extend the process and erode value

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The expected recovery value of the debt should always be the floor of the debt MV. If the debt can be recovered at 300k but MV is at 250k, there is essentially an arbitrage.

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