FIN.22:4 - Solution

1. State the debtor’s question, current cash runway and obligations, affected claimants and the latest dates at which choices remain available. Obtain the applicable legal and contractual facts for any route whose availability depends on them.
2. Form credible alternatives: consensual amendment or extension, operational and financial restructuring, new capital, asset or business sale, and available formal or exit routes. Identify the operating changes required to make a continuation viable.
3. Project each route’s timed operating and realization cash, process and disposal costs, taxes, collateral effects and interim finance. Establish who can actually provide interim money and under what consent, security and repayment conditions.
4. Apply the actual proposed or applicable treatment of claims. Calculate what each materially affected class or claimant receives, when, in which form and with what risk. A distribution to one claimant is not the same as value available to all.
5. Compare recoveries on a common valuation date and matching currency, timing and risk grounds. Use ranges or scenarios for uncertain realization and timing. Keep contractual claim amount, expected payment and present value distinct.
6. Examine whether the required consents, implementation capacity and interim funding make the route feasible. A financially preferable offer may still be rejected; report whose agreement is needed without asserting that financial superiority grants authority.
7. Return the route comparison, conditional proposal or reason no supported route remains. Identify the immediate funded action or specialist question that changes survival or feasibility. Keep any applicable notice or filing obligation with its actual institutional source.

Establish what must be kept alive, and until when

Begin with the debtor’s immediate payments and the time available to make a different route possible. FIN.2 supplies the dated cash need; FIN.12 supplies binding conditions, affected actions and remedy deadlines. Identify essential operations, people, assets and relationships that would be lost if funding stopped. A valuation of future recoveries is unusable as a survival plan if the debtor cannot reach the date at which they arise.

Keep an immediate stabilization action distinct from the eventual restructuring. A short agreed extension or interim facility may buy time to investigate and negotiate; it does not establish that the business is viable. Include its price, security, consents and fallback if the wider plan fails. An assumption of continued supply or creditor forbearance requires actual grounds. Obtain applicable legal advice about duties, procedure and authority when those determine the available action.

Diagnose the financial mechanism of distress. A viable operation with a concentrated maturity can need a financing change. An operation with persistent cash losses may need operational change, sale or closure as well. A profitable forecast can still be unfinanceable because working capital and maintenance consume the receipts. Use FIN.4 and the actual operating plan to distinguish these cases. Extending principal without repairing a continuing cash deficit simply moves the failure.

Build whole routes with attainable operating changes

Construct the alternatives appropriate to the debtor and its creditors: an agreed extension, reduced or converted claims, new money, operating restructuring, asset or business sale, and an available formal or exit route. The alternatives may combine these moves. Their labels are insufficient; state the payments, asset use, financing and claim treatment that make each route different.

For continuation, obtain a credible operating plan with the changes needed to restore supportable cash. Include transition spending, customer and supplier response, maintenance and later investment. Forecast what happens if the changes arrive late or achieve less than intended. The financial Method tests those consequences; it does not invent a turnaround capability merely because the spreadsheet needs higher margins.

For a sale, distinguish asset disposal from sale of an operating business. Establish which assets and contracts transfer, which liabilities remain, the sale process, achievable timing and net proceeds. An orderly sale and an immediate forced realization can have different values and costs. FIN.7 supplies the matching valuation premise; FIN.9 supplies retained-business and divestment consequences. Do not add a business value and the assets already supporting that value.

For exit, include the cash costs and remaining obligations of stopping, disposal, employee or supplier settlement where applicable, taxes and the procedure itself. The relevant alternative is the feasible exit under the actual conditions, not a frictionless book-value liquidation. A continued loss-making route needs comparison with what can actually be recovered and preserved by another route.

Establish the route’s funding before allocating its rewards

Draw a dated cash account from the present through the point where the route becomes self-supporting, refinanced, sold or closed. Identify the peak need, not only the final surplus. Obtainable interim finance must cover that need before its due dates, including negotiation and implementation costs. If no available arrangement does, retain the proposed route as conditional or remove it from the actionable set.

New money creates a claim or ownership interest. Recover its net proceeds, interest, fees, security, ranking, draw conditions and treatment if the plan fails. Existing creditors may have to consent to the use of collateral or a changed priority. The finance practitioner’s model cannot grant that priority. FDM supplies actual claims and event rules; the institutional source supplies which proposed treatment is legally or contractually attainable.

Do not count the same financing effect twice. The advance is a source for the interim cash account, not free value to distribute to old claimants. Its repayment or ownership participation reduces what they can receive. If a supplied enterprise or recovery value is already net of the interim claim or process cost, do not deduct it again. Conversely, if it is a gross value before those claims, make the deduction before comparing old creditors’ recoveries.

Debt capacity after restructuring must fit the repaired operation and its uncertainty. Turning unpaid principal into a larger later promise can increase the face claim without increasing expected payment. A debt-for-equity conversion may reduce mandatory service but transfers a residual interest whose value and control differ from cash. FIN.10–11 supply the financing construction; FIN.22 connects it to claimant recovery and the available distress routes.

Allocate value under each route’s actual claim treatment

Identify the relevant debtor or asset pool, secured and unsecured claims, guarantees, setoff or other material rights, and the applicable or proposed priority. Several entities or collateral pools cannot be combined into one distributable pot merely because they share owners. FDM.1–2 establish those boundaries. Use the responsible institutional interpretation when the effect of a right is disputed.

Work from the available net proceeds and apply the stated treatment in order. A senior capped claim receives no more than its allowed claim or the proceeds available to it; the remainder goes to the next permitted claim or class. Claimants sharing a class receive the allocation actually required by the arrangement, which may be proportional to their allowed claims. Equity receives only the residual under the stipulated treatment. These are calculation moves after the rights are established, not a universal legal priority schedule.

Allocate within each material scenario before calculating expected recoveries. Priority and caps are nonlinear. Allocating an expected total as though it were a certain pool can overstate junior or equity recovery and conceal senior loss in a low outcome. Keep the scenario probabilities, recovery dates and uncertainty grounds explicit. A range is more honest than an invented probability when only a range is supported.

When a plan offers cash, new debt and equity, value each actual instrument on matching grounds. Face amount is not the value of a delayed or risky promise. Use FIN.5 and FIN.7 for the claim-specific valuation, including its contingent rights and residual exposure. Use FIN.7’s bridge from enterprise value to the actual equity interest. Treating the full enterprise value as equity recovery while also crediting the debt claims would count their value twice. Preserve the difference between the allowed old claim, promised new treatment, expected payment and present value.

Compare total preservation and each participant’s position

First compare route-level net value on consistent boundaries, dates and risk grounds. Then compare each material claimant’s recovery against the relevant feasible alternative. A route that preserves more total value can still make a senior creditor worse off by delaying a payment while benefiting junior creditors or owners. That distribution matters to consent and negotiation; aggregate superiority cannot substitute for it.

Use a common valuation date and currency while allowing different justified discount or risk treatment for different claims. A shared date does not require one convenient rate for every recovery. Distinguish expected loss in the projected payment from the price of bearing its remaining risk, using FIN.5 to avoid double counting. If claims have different support, do not discount them all at the distressed corporation’s historical WACC.

Test the assumptions that can reverse the preference: sale proceeds, operating improvement, time to agreement, interim-finance price, process cost and priority. Identify the threshold or condition whose resolution would change the route. A modest apparent gain that disappears with a short delay or ordinary cost overrun supports a conditional recommendation and timely contingency, not an assertion that restructuring is certainly better.

Assess proposed transfers or concessions as changes to the route. An interest uplift, priority change or equity participation can compensate a participant only to the extent that the resulting payments or rights have value and the treatment can be agreed or imposed under the applicable procedure. Recalculate every affected recovery after the change. Do not promise the same remaining value to two creditor groups.

Return an implementable proposal or a precise unresolved condition

State the proposed operating and claim changes, the financing needed to reach them, the affected participants and the actual consents or procedure on which they depend. Include immediate action and the date after which another route or specialist response is needed. Use FIN.16 to return the advice and FIN.15 for sufficient authorized financial actions.

Separate financial preference, feasibility, agreement and actual performance. A modeled route may be worth proposing without being agreed. A signed arrangement may still require operational execution. Continue monitoring cash and the few milestones that determine survival or recovery; return when those conditions change. Do not keep an earlier preferred route alive in the recommendation after its finance, agreement date or operating premise has failed.