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

A mid-sized manufacturer has missed an interest payment on its bank loans but remains operationally viable. Its lenders, bondholders and management are considering a negotiated agreement outside formal bankruptcy. Which feature is generally an advantage of an out-of-court workout compared with a formal court-supervised reorganization?

Out-of-court workouts usually have lower direct legal and administrative costs and are resolved faster than court reorganizations. Binding stays, forcing dissenting creditors to accept a plan, and automatic super-priority financing come from formal bankruptcy law, which a voluntary private negotiation lacks.

  1. ALower direct legal and administrative costs and faster resolutionCorrect
  2. BA binding stay that prevents every creditor from enforcing claims
  3. CAbility to bind dissenting creditors by a majority class vote
  4. DAutomatic priority for new financing over all existing secured debt

Explanation

Workouts avoid court process, so they typically cost less and move faster and preserve confidentiality. A binding stay, cramdown of dissenters and automatic super-priority financing are features of formal court proceedings, not of voluntary workouts.

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