Chapter 24

An absolute priority rule is a specification of which claims in a liquidation process are satisfied first, second, third, and so forth in receiving distributions.

Acceleration is a requirement that debt be repaid sooner than originally scheduled, such as when the senior lender can declare the senior debt due and payable immediately.

A blanket subordination prevents any payment of principal or interest to the mezzanine investor until after the senior debt has been fully repaid.

Bridge financing is a form of gap financing - a method of debt financing that is used to maintain liquidity while waiting for an anticipated and reasonable expected inflow of cash.

Chapter 11 bankruptcy attempts to maintain operations of a distressed corporation that may be viable as a going concern.

Chapter 7 bankruptcy is entered into when a company is no longer viewed as a viable business and the assets of the firm are liquidated. Essentially, the firm shuts down its operations and parcels out its assets to various claimants and creditors.

A cramdown is when a bankruptcy court judge implements a plan of reorganization over the objections of an impaired class of security holders.

When secured lenders extend additional credit to the debtor company, it is commonly known as debtor-in-possession financing (DIP financing).

Fulcrum securities are the more junior debt securities that are most likely to be converted into the equity of the reorganized company.

An intercreditor agreement is an agreement with the company's existing creditors that places restrictions on both the senior creditor and the mezzanine investors.

A PIK toggle allows the underlying company to choose whether it will make required coupon payments in the form of cash or in kind, meaning with more mezzanine bonds.

A plan of reorganization is a business plan for emerging from bankruptcy protection as a viable concern, including operational changes.

A springing subordination allows the mezzanine investor to receive interest payments while the senior debt is still outstanding.

In stretch financing, a bank lends more money than it believes would be prudent with traditional lending standards and traditional lending terms.

A takeout provision allows the mezzanine investor to purchase the senior debt one it has been repaid to a specified level.

The weighted average cost of capital for a firm is the sum of the products of the percentages of each type of capital used to finance a firm times its annual cost to the firm.