If you own senior unsecured bonds and the company goes into Chapter 11 - can they issue new debt which would then be ahead of you in the capital structure?
I remember this from the CFA materials years back but never had to mess with it in real life until now.
From what I remember creditors are obviously part of the solution, so you would think they would balk at being made more junior unless they could get a better deal?
Yes they can do this. You might have a scenario where the senior bonds are converted to new senior bonds + equity. The sub debt could be wiped out entirely, traded for a smaller share of the same class, or traded for only a portion of the equity. The circumstances in bankruptcy vary widely. You can say they can balk, but what power does the sub debt really have? Depending on the specifics, it can be difficult to avoid a cram down.
From what I have seen, rarely will the company have much debt during the exit, it is often substantially converted to equity and in some cases nearly all is converted (80-100%). In some perversely funny situations, the company has too much debt coming out of bk and then goes bk again a few years later. The amount and quality of the debt are key factors in the potential longevity of the new equity.
Unsecured creditors should be happy not to get fully wiped out in Chapter 11 given their low priority claims in the pecking order. All critical vendors and secured debt ride through first and in addition, the company must obtain debtor-in-possession financing in order to continue its operations throughout the bankruptcy process. Very often the first lien lenders will provide the DIP financing in exchange for being made whole, sometimes the new money may come from a third party.
It is extremely unlikely that 1) unsecured lenders will want to provide new money in the form of DIP financing, or 2) will be allowed to fund a DIP loan which will “priming”, i.e. ahead of the existing secured liens. So in most cases new DIP money will go ahead of the unsecured lenders, they’ll just negotiate a small recovery and go away.