Skip to content

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

A firm in Chapter 11 has a reorganization plan. Creditors are grouped into classes, and the court considers confirmation. A senior class votes to reject the plan, while other classes accept. Under the absolute priority rule, which outcome is consistent with a cramdown on the rejecting senior class?

A cramdown on a dissenting senior class is consistent with absolute priority only if the senior class is paid in full before juniors or equity receive anything. Unanimous acceptance is not required, and letting equity keep value while seniors take losses would violate the rule.

  1. AJunior creditors receive value only after the senior class is paid in full, and equity gets nothing unless all senior claims are satisfied.Correct
  2. BEquity holders retain their stake while the senior class takes a haircut, provided management supports the plan.
  3. CJunior creditors are paid pro rata alongside the senior class regardless of the seniority.
  4. DThe plan is confirmed only if every class unanimously accepts.

Explanation

Absolute priority requires that a senior dissenting class be paid in full before any junior class or equity receives value. Cramdown can bind a dissenting class if the plan is fair and equitable, which includes this priority. Equity retention with a senior haircut violates it, and unanimity is not required.

Did you get it right without looking?

One question tells you little. A timed set on Distress Symptoms and Remedies shows your real accuracy, how long you take and where you lose marks.

Practise Distress Symptoms and RemediesFree diagnostic mock

More Distress Symptoms and Remedies questions