Exchange Offer, Exit Consents, and the Holdout Decision
Cascade Resources has $800 million of 8.5% senior unsecured notes due 2026 trading at 58, and a $200 million revolver that is fully drawn, secured by all assets, and costs 7%. Trailing EBITDA is $95 million against $82 million of annual cash interest. Cascade launches an exchange offer: per $1,000 of old notes, holders receive $600 of new 11% senior secured notes due 2030 plus $40 of cash, with an extra $25 of new notes for tendering before the early deadline. The offer is conditioned on 50.1% participation, and Cascade is simultaneously soliciting exit consents to delete the negative pledge and most restrictive covenants. A liquidation analysis circulated to the ad hoc group shows 40-45 cents for unsecured creditors in a Chapter 11.
1. Compute the recovery per $1,000 for early and late tendering holders, and compare both to the 58 trading level.
Read the worked answer
Per $1,000 of old notes:
- Early: $600 + $25 = $625 of new notes + $40 cash = $665, or 66.5% of face
- Late: $600 of new notes + $40 cash = $640, or 64.0% of face
Against 58: the early premium is 8.5 points (+14.7%); the late premium is 6.0 points (+10.3%).
The nominal recovery understates the improvement. The old notes are senior unsecured and mature in 2026; the new notes are senior secured and mature in 2030. Even the late consideration is a better instrument than what the holder owns today, which is why a holder should not anchor on the face-value comparison alone.
Cash check: $40 per $1,000 on the full $800M is $32M of cash if everyone tenders, plus fees - confirm liquidity covers it before the offer is launched.
2. Assuming 70% participation, build the pro forma capitalization and coverage, and assess whether the exit consents can be delivered and what they can and cannot do.
Read the worked answer
At 70% participation ($560M tendered, all early):
- New notes: 560 x 0.625 = $350.0M
- Cash out: 560 x 0.04 = $22.4M
- Old notes remaining: $240.0M
- Pro forma debt: 350.0 + 240.0 + 200.0 = $790.0M versus $1,000M today
- Cash interest: (350.0 x 11% = 38.5) + (240.0 x 8.5% = 20.4) + 14.0 revolver = $72.9M versus $82.0M
- Coverage: 95 / 72.9 = 1.30x versus 1.16x; leverage still 8.3x
Exit consents: 70% clears the 50.1% condition, so a majority amendment can delete the negative pledge and restrictive covenants - that is precisely what allows the new notes to be secured by the same collateral.
What it cannot do: reduce principal, reduce interest, or extend maturity without the consent of each affected holder (Trust Indenture Act Section 316(b)). It also cannot cure the $240M still maturing in 2026.
Verdict: the exchange buys about $9M of annual interest savings and four years on the exchanged tranche. It does not fix the capital structure, and the revolver lenders must consent to the priming lien or the new notes are not actually secured.
3. A holder of $100 million is deciding whether to tender or hold out. Analyze the decision and recommend whether Cascade should raise the minimum condition to 95%.
Read the worked answer
Tender: 66.5 points in secured paper and cash.
Hold out: retain an unsecured claim maturing 2026. At 70% participation the holdout sits in a $240M stub - large enough to block a non-consensual out-of-court amendment, but not large enough to control a Chapter 11, especially against a pre-arranged plan. The disclosed liquidation analysis implies 40-45 cents, and the company has signaled a plan toggle.
Expected value: 66.5 versus 40-45 plus time, professional fees, and litigation risk. Holding out only pays if the stub position can extract roughly 22 points of incremental value - unlikely unless the collateral is worth materially more than the liquidation analysis shows.
On the minimum condition: raising it to 95% would eliminate the holdout problem and prevent a blocking stub, but a 95% threshold is hard to hit, and conditioning the deal on near-universal participation while soliciting exit consents is exactly the fact pattern that invites a coercion challenge.
Recommendation: set the minimum at the level actually needed - 66 2/3% if the substantive amendments require it - pair it with a revolver-lender consent to the priming lien, and keep a solicitation of the remaining holders open so the stub can be cleaned up after closing rather than becoming a blocking position.