FIN.22:5.2 - Recover value from a continuing business and new instruments

In a separate constructed proposal, the old creditor’s allowed claim is 100. The feasible liquidation alternative pays it 60 now, net of all relevant costs and other claims. A continuation plan requires 20 immediately for implementation. A new lender actually offers 20 net on specified terms, with a claim paying 22 in one year and valued at 20 on the common comparison date. The proposed treatment ranks this claim ahead of the replacement note described below. The dated plan covers the other operating and financing needs; acceptance of the proposed claim treatment remains required.

FIN.7 supplies a supportable operating value of 120 for the subsequent cash flows of the implemented plan, before payments to financing claims. The upfront 20 is paid from the advance and is outside those subsequent flows; no surplus advance remains as cash to add to the value. The new-money debt is deducted once when deriving the interests available under the plan. There are no other prior claims, excess assets or omitted implementation costs.

The proposal extinguishes the old claim of 100 in exchange for a new note promising 40 in two years and 50% of the ordinary equity. On compatible FIN.5/7 valuation grounds, the note is worth 32, reflecting its actual timing, priority and risk. The note’s face amount is not its present value. All ordinary shares have identical proportionate economic rights, and there is no separate control adjustment in this case.

Deduct the actual debt values to obtain common equity: 120 − 20 − 32 = 68. The old creditor receives the note worth 32 plus half the equity, worth 34, for a recovery value of 66. The other half is worth 34 to the remaining owners. The new lender’s 20, the creditor’s 66 and those owners’ 34 sum to 120. The old face claim of 100 has been replaced; it is not another deduction alongside the new instruments.

Compared with liquidation at 60, the creditor gains value 6 on the stated grounds. The 66 is a valuation of its promised note and ownership, not cash available to meet an immediate payment. Trading or financing against those interests would need its own attainable terms. Neither the continuing business value of 120 nor the exchanged face amount of 100 is the creditor’s receipt.

With the same supported debt values, the creditor’s recovery is 32 + 0.50 × (V − 20 − 32), where V is the continuing operating value. It matches 60 at V = 108. This identifies the conditional valuation threshold; if a revised operating outlook also changes debt risk or terms, revalue those claims before using it. A favorable value comparison supports a proposal; obtaining the required agreements and completing the funded plan remain separate actions.