Recap recap June 6, 2013 at 8:17 pm
Paul Melaschenko and Noel Reynolds have an interesting idea for recapitalisation of a failing bank. The essential idea is:
- You figure out how much equity the bank needs to be palpably and obvious solvent: call that x.
- You seize all the existing equity and all the existing sub debt (the holders will get something for that). Say the sub debt par value is y, and the shareholder’s funds are z.
- You seize x-y-z worth of senior debt too.
- You set up a HoldCo. The old equity holders get equity in the HoldCo; the sub debt holders get sub debt in it; and the old senior debt holders get senior debt (to make up for their write down).
- HoldCo has z of equity, y of sub debt, and x – y – z of senior debt as liabilities. It has x of equity in the bank as assets.
- You sell the re-cap’d bank’s equity to the market.
- The HoldCo now has cash as an asset. It pays off liability holders in order.
Now, this all depends on getting x right. If the market still doesn’t think the bank has positive value after the recap, you have a problem. But so long as x is big enough, the senior debt holders will get something to compensate them for the bail-in; the equity holders probably won’t, unless you had an itchy figure on the recap trigger. Still, it’s quite neat.