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Posted On: 11/14/2019 7:23:04 PM
Post# of 149265
Re: Northstar42 #10998
Northstar, Corps are different. Collateral mean promise not to sell, rent out and only keep etc.
I can use an example to better explain.
Lender 1 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 1 finances with collateral, amount of $50 million. Lender 1 gets notes at a prior date.
Lender 2 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 2 feel good about the ~$60 outstanding debt, and finances with the same collateral, amount of $100 million. Lender 2 gets notes at a later date.
Lender 3 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 3 feel good about the ~$160 outstanding debt, and finances with the same collateral, amount of $300 million. Lender 3 gets notes at a latest date.
So, the corp get $450m in finance. Lets say the corp is crazy enough to gamble/invest and loose all the money, in a few months company files for BK. Collateral is there, because they promised not to sell it. BK court sell the assest for $400 million dollars, to institute X (non of the lenders own it).
Base on the priority date.
Someone takes the first $11m (liability + cost)
Lender 1 takes $60m (liability,+ cost of borrowing + some cost)
Lender 2 takes $119m (liability,+ cost of borrowing + some cost)
Lender 3 takes $210m (liability,+ cost of borrowing + some cost)
If the asset was sold for $700m all lender would take their money and about $200m (or the remainder) goes to owners (or shareholders)
So when a lender asks for collateral, it is good for shareholders too. Because they secure the asset, and the corp cannot blow the asset itself up.
I can use an example to better explain.
Lender 1 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 1 finances with collateral, amount of $50 million. Lender 1 gets notes at a prior date.
Lender 2 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 2 feel good about the ~$60 outstanding debt, and finances with the same collateral, amount of $100 million. Lender 2 gets notes at a later date.
Lender 3 wants to finance the corp, looks at liablity and any asset they can use as collateral as they want to take money in case of BK. Lender 3 feel good about the ~$160 outstanding debt, and finances with the same collateral, amount of $300 million. Lender 3 gets notes at a latest date.
So, the corp get $450m in finance. Lets say the corp is crazy enough to gamble/invest and loose all the money, in a few months company files for BK. Collateral is there, because they promised not to sell it. BK court sell the assest for $400 million dollars, to institute X (non of the lenders own it).
Base on the priority date.
Someone takes the first $11m (liability + cost)
Lender 1 takes $60m (liability,+ cost of borrowing + some cost)
Lender 2 takes $119m (liability,+ cost of borrowing + some cost)
Lender 3 takes $210m (liability,+ cost of borrowing + some cost)
If the asset was sold for $700m all lender would take their money and about $200m (or the remainder) goes to owners (or shareholders)
So when a lender asks for collateral, it is good for shareholders too. Because they secure the asset, and the corp cannot blow the asset itself up.
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