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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A distressed fund estimates an enterprise value of $300 million at emergence. Claims are: $120 million senior secured (fully collateralized by assets worth $150 million), $200 million senior unsecured, and equity. Ignoring administrative costs, what is the approximate recovery rate on the senior unsecured claims?

Unsecured recovery is about 90%. The $120 million secured claim is paid first from the $300 million value, leaving $180 million for $200 million of unsecured claims, so recovery is 180 divided by 200, or 90%.

  1. A90%Correct
  2. B150%
  3. C60%
  4. D85%

Explanation

Secured claim is paid in full: $120m. Remaining value = 300 - 120 = $180m. Unsecured claims of $200m receive 180/200 = 90%. Using 300/200 ignores the senior claim, giving 150%, which is above 100% and impossible; 60% would divide the leftover by a wrong base.

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