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CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers

An analyst reviews a high-yield issuer's capital structure with secured bank debt, senior unsecured notes and subordinated notes. In a bankruptcy, the creditor class most likely to recover the lowest percentage of its claim is the:

Subordinated noteholders most likely recover the lowest percentage. Under the priority of claims, secured lenders are paid first from collateral, then senior unsecured creditors, and subordinated creditors are paid only from what remains, so they bear the greatest loss in bankruptcy.

  1. Asenior unsecured noteholders
  2. Bsubordinated noteholdersCorrect
  3. Csecured bank lenders

Explanation

Absolute priority places secured lenders first, then senior unsecured, then subordinated creditors. Subordinated noteholders rank lowest among the debt classes and typically recover least. The senior unsecured class ranks higher and is therefore wrong.

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