Case Study Debrief: Distressed Debt Restructuring Verso Corp, part three. Let's deal now with some of the answers to the quantitative questions in the case study and start by looking at the cashflow based debt capacity analysis. In this case, we've assumed that the lenders are willing to lend to the business for a seven year period since they're doing cashflow based lending. Obviously, the longer you can convince the lenders to lend to you, the better. So, at the simplest level, the debt capacity analysis based on cash flows is a straightforward present value calculation using the after tax cost of debt. So in our example, we're assuming lenders are willing to lend to the business for seven years and they'll charge an 8% interest rate. So with a tax rate of 35%, which it was at the time, assuming the interest is tax deductible, then the maximum that they would be willing to lend to the business is 682 million. We often can't assume that they will lend the whole amount so we've applied a slight discount in this case of 10%, which we've identified here as a haircut. This can also be accomplished by applying a debt service coverage ratio to the cash flows. And this results in a principle amount of 614. This translates into around three times debt to EBITDA, and this would only be for the senior tranche. In other words, this debt will be repaid over a seven year period and this won't necessarily include the subordinated tranche and it obviously won't include the equity value in the business. So, remember, if the business continues, there will be some equity value. So it's not the full story, but it typically will relate simply to the senior tranche of the debt. And since the senior tranche of the debt has the first claim on the assets, this is typically the tranche that we need to get right first. Obviously, 614 million is a lot less debt than they currently have, so this may or may not be a viable path forward for Verso. Another option is to sell the business. And in this case, if we look at the comparable set, we can see that they're trading between 5.3 times and around nine times LTM EBITDA. And we've used the LTM EBITDA rather than a forward multiple because it's a useful comparison to the three times LTM EBITDA that was used in the debt capacity study. In addition, Verso is having a significant integration issue with the new page acquisition and their forward year one EBITDA is incredibly distressed. So it makes more sense to use an LTM multiple in this situation. However, this is probably the very top end of our expectations because it is a fire sale and you're unlikely to be able to realize full value. We're selling the business quickly. Any potential bidders would know that we're desperate. So it would be a case of a willing seller, but not necessarily a willing buyer. And this means if we're assuming a 5.3 times multiple on the low end, this is the maximum value that we will get from the fire sale. When we compare that to the debt restructuring in the prior slide with the debt capacity analysis where we had three times EBITDA for senior lending, that in addition to the subordinated lending, which could be anywhere from one to two times EBITDA, as well as the equity value, which would be in addition to the four to five times of debt coverage, we would most likely maintain more value for the company and for the stakeholders doing the debt restructuring than the fire sale. Because in this case, it's not even a given that we could get the 5.3 times in this fire sale.
