Qwest Communications Bond-Swap Offer: Explanatory Note
2 Pages Posted: 21 Oct 2008
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Qwest Communications Bond-Swap Offer: Explanatory Note
Abstract
This note explains relevant aspects of bankruptcy proceedings and the “rule of absolute priority” in the context of the case (UVA-QA-0647). It is intended to assist students without sufficient knowledge of the U.S. Bankruptcy Code in their calculations of the financial implications of the exchange offer.
Excerpt
UVA-QA-0668
Qwest Communications Bond-Swap OfferExplanatory Note
The bond-swap offer by Qwest Communications proposed to convert existing $ 1,000 bonds into new bonds with a reduced face value and modified rates and maturity dates. In the case of existing 7.75% bonds with maturity in 2006, for instance, Qwest offered an exchange for a new bond with a face value of $ 680, a yield of 13%, and a maturity date in 2007 (Exhibit 5 in the A case). The new bond would have the status of a “senior subordinated debt” in the case of a bankruptcy. That status moves the converted bond higher up in the hierarchy of claims on the firm's remaining value in case of a bankruptcy (be it in a liquidation under Chapter 7 of the Bankruptcy Code or in a restructuring under Chapter 11). As assets are distributed to creditors, claims of higher priority receive full payment before any junior claims are satisfied. By this “rule of absolute priority,” senior claimholders receive less than the full value of their allowed claim only if more junior claimholders remain empty-handed.
The Bankruptcy Reform Act of 1978 (“Bankruptcy Code”) distinguishes between claims of the following priorities:
1. Secured claims, which are secured by liens on those debtor assets that serve as collateral for the debt
2. Administrative claims, which include all claims arising after the bankruptcy filing
. . .
Keywords: bankruptcy
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