FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies
A distressed investor estimates the enterprise value of a bankrupt firm at USD 300 million. Claims are: first-lien secured debt USD 180 million, senior unsecured debt USD 150 million, and subordinated debt USD 70 million. Assuming strict absolute priority and no administrative costs, what is the expected recovery rate on the senior unsecured debt?
Value of USD 300 million first pays the USD 180 million secured claim, leaving USD 120 million. This is shared by USD 150 million of senior unsecured claims, giving a recovery rate of 80%. Subordinated debt and equity receive nothing.
- A80.0%Correct
- B100.0%
- C60.0%
- D50.0%
Explanation
After paying the secured debt of 180, the remaining value is 120. The unsecured claim is 150, so recovery is 120/150 = 80%. The 60% answer wrongly divides 180 by 300, and 50% uses 150/300 ignoring seniority.
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