Chapter 17: Liquidation & Restructuring - Multiple Choice

Under Article I, Section 8, of the U.S. Constitution, who has the power to create "uniform laws" on bankruptcies? A) Congress B) Each of the state legislatures C) The Executive Branch, with Senate consent D) The U.S. Supreme Court

A) Congress

Which entities may discharge debts in a Chapter 7 bankruptcy filing? A) Individuals B) Corporations C) Partnerships D) Individuals, corporations and partnerships

A) Individuals

What is "DIP financing" in a Chapter 11 bankruptcy case? A) Loans or credit granted after the petition is filed B) Loans or credit granted before the petition is filed C) Interim financing supplied by the government D) Refinancing of the company's existing debts under court supervision

A) Loans or credit granted after the petition is filed

In Chapter 11, what is the name of the formal meeting that creditors may attend, that gives them the right to ask questions and examine records? A) Section 341 meeting B) Section 407 meeting C) Debtor Conference D) Resolution Conference

A) Section 341 meeting

A bondholder claims that a company has defaulted on its debt, because a default event has occurred. The bond issuer disputes this claim. What authority defines specific default events under the terms of the bond? A) Terms of the Credit Agreement and Indenture B) Provisions of federal law C) The company's SEC filings D) An arbitrator must decide based on precedents

A) Terms of the Credit Agreement and Indenture

The provision in an indenture that provides bondholders with the right to require the issuer to repurchase the notes at a premium of 101% of par in the event of a change in majority ownership of the company is known as a A) change of control put B) ownership switch provision C) substantial asset sale swap D) limitation on mergers covenant

A) change of control put

Which of the following types of liens provides lenders with the greatest comfort? A) first lien B) second lien C) third lien D) no lien

A) first lien

As a general rule, a higher ranking in the capital structure hierarchy denotes A) lower risk and lower cost of capital B) lower risk and higher cost of capital C) higher risk and lower cost of capital D) higher risk and higher cost of capital

A) lower risk and lower cost of capital

The pledge of, or lien on, collateral that is granted by the borrower to the holders of a given debt instrument is known as A) security B) seniority C) contractual subordination D) structural subordination

A) security

A senior secured debt instrument issued at the same legal entity as a senior subordinated debt instrument would be considered A) senior B) junior C) subordinated D) pari passu

A) senior

In the event a material default is not waived by a borrower/issuer's creditors, the borrower/issuer typically seeks A) protection under Chapter 7 of the Bankruptcy Code B) protection under Chapter 11 of the Bankruptcy Code C) a covenant amendment D) a trial by jury

B) protection under Chapter 11 of the Bankruptcy Code

For Chapter 11 filings, the Bankruptcy Code requires at least one meeting of creditors, which the debtor firm is required to attend with legal counsel. This is called A) A resolution conference B) A Section 341 meeting C) The preliminary examination D) A Section 17 meeting

B) A Section 341 meeting

What is the role of an "asset purchase agreement" (APA) in a Chapter 11 bankruptcy proceeding? A) Provide representation for junior creditors B) Allow an acquirer to make a pre-emptive bid on favorable terms C) Allow the DIP to attract new financing D) Petition the court for protection of specific assets against creditor claims

B) Allow an acquirer to make a pre-emptive bid on favorable terms

How is the U.S. Trustee compensated in a Chapter 11 bankruptcy? A) By the courts, monthly B) By the DIP, quarterly C) The U.S. Trustee is a salaried government employee D) The U.S. Trustee must agree not to be compensated

B) By the DIP, quarterly

Call protection refers to which of the following? A) The ability to redeem a company's debt instruments any time at par B) Certain restrictions on voluntary prepayments or redemptions during a defined period of time C) The period after a bond's maturity that the issue can be called D) The period in which a bond's coupon can be eliminated if the issuer is in financial distress

B) Certain restrictions on voluntary prepayments or redemptions during a defined period of time

The section of the U.S. Bankruptcy Code that allows individuals to obtain a "fresh start" by discharging debts is A) Chapter 5 B) Chapter 7 C) Chapter 11 D) Debtor-in-possession

B) Chapter 7

What term describes a company's total borrowings, notes and bonds, deferred purchases and capitalized leases? A) Debt float B) Funded debt C) Gross liabilities D) Sinking fund

B) Funded debt

Rank the following classes of securities in order of their priority, from highest priority to lowest: I. preferred stock II. senior subordinated debt III. senior secured debt IV. equity A) I , II, II, IV B) III, II, I, IV C) II, III, VI, I D) IV, I, III, II

B) III, II, I, IV

A bond indenture includes a restriction on the borrower's ability to use corporate assets in ways that are harmful to creditors. This restriction is called a A) Prohibitive lien B) Negative covenant C) Right of last resort D) Hard asset ratio

B) Negative covenant

Call protection refers to which of the following? A) the ability to call a company's debt instruments any time at par B) certain restrictions on voluntary prepayments or redemptions during a defined time period C) the period after a bond's maturity that the issue can be called D) period in which a bond's coupon in elimination if the issuer is in financial distress

B) certain restrictions on voluntary prepayments or redemptions during a defined time period

The confirmation of a plan of reorganization despite the objection of a creditor class is known as a A) auction B) cramdown C) bakeoff D) credit event

B) cramdown

A group of the 20 largest bondholders form a group after the filing of a Chapter 11 petition known as the A) voluntary committee B) creditors' committee C) trustee D) debtor

B) creditors' committee

A group of the 20 largest debt holders for a group after the filing of a Chapter 11 petition. This committee is known as a A) voluntary committee B) creditors' committee C) trustee committee D) debtor committee

B) creditors' committee

Under lien subordination in a bankruptcy scenario, which of the following statements is TRUE? A) first and second lien debt is pari passu and repaid at the same time B) first and second lien debt is pari passu, but first lien lenders will be repaid before any second lien lenders C) first and second lien debt is not pari passu D) first and second lien debt is not subject to lien subordination

B) first and second lien debt is pari passu, but first lien lenders will be repaid before any second lien lenders

Financial maintenance covenants require the borrower to A) perform certain actions B) maintain its credit profile by repaying debt and/or growing cash flow C) limit the undertaking of certain specified actions D) prevent cash from being distributed by the borrower to equity holders

B) maintain its credit profile by repaying debt and/or growing cash flow

A term in a credit agreement that requires prepayment of term loans with cash generated or received from some event, refers to which of the following? A) hard call B) mandatory prepayments C) voluntary prepayments D) offer to purchase

B) mandatory prepayments

A plan of reorganization that is agreed upon by the company's creditors and equity holders prior to a bankruptcy filing is known as a A) cramdown B) pre-pack C) credit event D) remedy

B) pre-pack

In the event a material default is not waived by a borrower's creditors, the borrower typically seeks A) protection under Chapter 7 of the bankruptcy code B) protection under Chapter 11 of the bankruptcy code C) a covenant amendment D) a trial by jury

B) protection under Chapter 11 of the bankruptcy code

What is the primary function of a guarantee? A) provide covenant protection B) provide credit support C) create an additional legal entity D) change a credit rating

B) provide credit support

The priority status of a creditor's claims against the borrower/issuer relative to those of other creditors is known as A) security B) seniority C) collateral D) standing

B) seniority

What document establishes the terms between a corporate borrower and a bondholder, including maturity date, interest payments and default events? A) Master Promissory Note B) Bond Registration Statement C) Credit Agreement and Indenture D) UCC Filing

C) Credit Agreement and Indenture

A company enters Chapter 11 bankruptcy to obtain relief from burdensome pension and retiree health care funds. For some time, the company has missed making promised contributions to these funds. Before these obligations can be assigned to an acquiring company in bankruptcy, missed payments must be made up. This is called A) Re-allocation B) Rehabilitation C) Curing D) Material modification

C) Curing

After filing a Chapter 7 bankruptcy petition, a company must attend an initial meeting with a U.S. Trustee within seven working days. This is called the A) Process & Planning Meeting B) Pre-examination C) Debtor Conference D) Post-filing Inquiry

C) Debtor Conference

Contractual subordination has which of the following characteristics? I. It is established through subordination II. It is contained in an indenture III. It stipulates that the claims of senior creditors must be satisfied in full before those of junior creditors IV. It refers to the priority status of debt instruments at different legal entities A) I only B) I and II only C) I, II, and III only D) I, II, III, and IV

C) I, II, and III only

The power of Congress to create "uniform laws on the subject of bankruptcies throughout the United States" was established by: A) A series of federal laws B) Federal regulation C) The U.S. Constitution D) The Bankruptcy Code

C) The U.S. Constitution

What entity administers the U.S. Trustee program, under which U.S. Trustees are appointed to administer Chapter 11 bankruptcy cases? A) The Secretary of the Treasury B) The federal bankruptcy courts C) The U.S. Department of Justice D) The Secretary of State of the state of filing and jurisdiction

C) The U.S. Department of Justice

A public company that operates a defined benefit pension plan goes bankrupt. Due to underfunding, the plan is able to pay only a small fraction of the benefits due to current and future retirees. What will happen to claims of its plan participants? A) They will be settled in bankruptcy B) Stockholders may be forced to pay them C) They will be taken over by a Federal corporation D) A special referee will settle all claims

C) They will be taken over by a Federal corporation

Under what circumstances may a Chapter 11 Debtor in Possession (DIP) sell or transfer corporate assets? A) "In the best interest of solvency" B) With the permission of a creditor committee C) With the approval of the court D) Only to a stalking horse

C) With the approval of the court

The priority status of debt instruments at the same legal entity refers to which of the following? A) security B) standing C) contractual subordination D) structural subordination

C) contractual subordination

If the liquidation value of a company is $1 billion and the company has $1.5 billion of bank debt outstanding, the bank debt would be considered A) satisfied B) unimpaired C) impaired D) bankrupt

C) impaired

If the liquidation value of a company is $1 billion and the company has $1.5 billion of bank debt outstanding, the bank debt would be considered A) satisfied B) unimpaired C) impaired D) bankrupt

C) impaired

When a capital structure includes junior debt not governed by an indenture, where are the subordination provisions located? A) indenture B) credit agreement C) intercreditor agreement D) letter of intent

C) intercreditor agreement

Which of the following statements regarding pre-packs is TRUE? A) it is intended to impair other classes of creditors B) it is hostile in nature C) it is intended to shorten the length of the bankruptcy process D) it is a prelude to a 363 sale process

C) it is intended to shorten the length of the bankruptcy process

Voluntary prepayments refer to which of the following? A) a repayment of the entire term loan balance upon an initial public offering B) elections by company shareholders to repay term loan balances C) optional repayments of a term loan that are not mandated by an amortization schedule D) a waiver of the requirement to repay term loan balances with excess cash flow

C) optional repayments of a term loan that are not mandated by an amortization schedule

The pooling of assets and liabilities of separate legal entities into one legal entity under a bankruptcy scenario is referred to as a A) cramdown B) remedy bar C) substantive consolidation D) pre-pack

C) substantive consolidation

Acceleration refers to which of the following? A) The borrower's right to repay its principal prior to maturity B) A change of control event C) Covenant defeasance D) A lender's right to have its principal due immediately

D) A lender's right to have its principal due immediately

Which of the following creditors normally has the highest and strongest claim in a Chapter 11 bankruptcy filing? A) Mezzanine debt B) Senior debentures C) Subordinated debt D) DIP financing

D) DIP financing

A company's "tangible net worth" is a key measure of its value and financial strength, for purposes of evaluating ability to repay debts. This ratio begins with book value and then subtracts assets such as A) Cash on hand B) Funded debt C) Property, plant and equipment D) Goodwill

D) Goodwill

Which of the following are primary components in determining a borrower's current liquidity I. cash balance II. revolver availability III. letters of credit IV. free cash flow A) I only B) I and II C) I and III D) I, II, III, and IV

D) I, II, III, and IV

Rank the following corporate securities in order of priority in liquidation, from first to last I. Subordinated debentures II. Unsecured Debt III. Senior Debt IV. Preferred Stock A) I, III, II, IV B) II, I, III, IV C) III, IV, I, II D) III, II, I, IV

D) III, II, I, IV

All of the following are potential roles of the unsecured creditors committee in a bankruptcy filing EXCEPT A) Liaise between the debtor and the various creditors B) Review motions filed with the court C) Negotiate with stalking horse bidders D) Perfect secured liens

D) Perfect secured liens

In a Chapter 11 bankruptcy, a committee of creditors develops a plan for restructuring debts. However, the bankruptcy court judge approves a different plan, one that has been voted down by creditors. Which of the following is TRUE about this situation? A) The judge is exceeding court authority B) Creditors may appeal the judge's decision to a state court C) The judge is imposing a "bench privilege" D) The judge is imposing a "cram-down"

D) The judge is imposing a "cram-down"

A company is not able to pay bond interest or preferred stock dividends, and ultimately it is forced into bankruptcy. What will happen to the unpaid preferred stock dividends? A) They normally are repaid in bankruptcy B) The bankruptcy court will consider preferred stockholders' priority of claims C) They will be accrued and paid by the surviving or acquiring entity D) They are not guaranteed and may not be paid

D) They are not guaranteed and may not be paid

In a Chapter 11 bankruptcy filing, what voice do a corporation's equity security holders normally have in restructuring debts? A) They are considered equal to any debt holders B) They are considered equal to junior debt holders C) They participate in the creditors' committee, but have less influence than all creditors D) They have little or no voice

D) They have little or no voice

Acceleration refers to which of the following? A) the borrower's right to repay its term loan balance without penalty B) a change of control event C) covenant defeasance D) a lender's right to have their principal due immediately

D) a lender's right to have their principal due immediately

The primary difference between the covenants for bank debt versus the covenants for bonds is that A) credit agreements have positive covenants, while bonds have negative covenants B) credit agreements have negative covenants, while bonds have positive covenants C) credit agreements have incurrence covenants, while bonds have financial maintenance covenants D) credit agreements have financial maintenance covenants, while bonds have incurrence covenants

D) credit agreements have financial maintenance covenants, while bonds have incurrence covenants

The layer of capital that lies between traditional debt and equity is known as A) subordinated debt B) quasi-equity C) conversion debt D) mezzanine debt

D) mezzanine debt

An automatic stay means which of the following? A) once a bankruptcy case is commenced, creditors receive equity upon the company's emergence from bankruptcy B) once a bankruptcy case is commenced, creditors will be rolled into a DIP facility C) once a bankruptcy case is commenced, creditors are permitted to liquidate the company's assets D) once a bankruptcy case is commenced, creditors are not permitted to enforce their remedies

D) once a bankruptcy case is commenced, creditors are not permitted to enforce their remedies