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Hello Jack,

I haven't had a chance to put together an intelligent response until now. But, thanks for the reply. (You can judge the "intelligence" of this reply for yourself...)

I understand that this is a complex situation. But, fundamentally, I'm curious as to the rights of each kind of creditor. In particular, I'm most interested in what goes on BEFORE chapter 11.

Senior secured holders obviously hold all the cards. They can force liquidation of the assets that collateralize the loan.

What is unclear to me, is what legal rights do senior unsecured holders have? In the case of a company with assets in excess of debt, they also hold significant leverage. They could force liquidation of assets.

However, what about a case where assets are probably insufficient to cover debt in any liquidation proceedings? Here, I'd like to go back to Ford as an example. If Ford defaults on senior unsecured debt, creditors holding that debt couldn't force liquidation of assets. Liquidation of any assets would be a default on the senior secured bonds, wouldn't it? The senior secured credit lines that Ford recently drew down encumber 100% of assets; right down to the blue oval and all trademarks.

If there are no assets left unencumbered, then the unsecured creditors would seem to be left out in the cold in a liquidation situation. On the other hand, my understanding from what you wrote and what I've read is that all stakeholders would get something out of chapter11, with a court overseeing what each stakeholders group is entitled to.

But, what about PRE-filing. If a company defaults on a bond, what are the IMMEDIATE consequences? Does everything fly into motion? Or does it simply result in a flurry of phonecalls as creditors and management attempt to negotiate terms to satisfy the debt in some manner? Is this just one giant game of "chicken"? Or does it entirely depend on the situation. (If this is the correct answer, feel free to tell me "it's never the same, go away", LOL).

I want to go back to the Ford illustration, because it's the essence of my confusion. If senior unsecured debtholders don't have an obvious piece of the asset pie to access, it would seem to me that they have little or no leverage. If they were to force chapter11, they'd likely get creamed. In this kind of a situation, would there be more of an incentive to stay out of the courts, and try and negotiate terms for a special tender or equity swap? Your response points out the difficulty of negotiating with multiple holders, but if they have little leverage as a group, I'd expect more of a tendancy for the company to play hardball. Could a company possibly default on debt, without ending up in chapter11, or is this essentially impossible?

Thanks again for your reply.
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