Project Kirkstall — Emergence Capital Structure
A 2-hour Chapter 11 Emergence / Exit Financing case study with a complete model answer
Modeled After
Centerview Partners
Emergence materials combining a cash reconciliation, pro-forma emergence balance sheet scenarios laid out as a pro-forma debt by weighted-average-cost-of-debt grid, liquidity as a percentage of LTM revenue with sensitivity, fixed charge coverage, and pension termination claims valued at both Prudent Investor and statutory discount rates
Structure and exhibit set are modeled after Centerview Partners. The company, the financials and every figure in this case are entirely our own.
The Situation
Kirkstall Communications, Inc. sells managed voice, unified communications and managed network services to mid-market and enterprise customers across North America, through two lines of business: Kirkstall Connect, the managed voice and unified communications business, and Kirkstall Networks, the managed network business.
Kirkstall Communications, Inc.
- Sector
- Enterprise communications — managed voice and unified communications through Kirkstall Connect, and managed network services through Kirkstall Networks, sold to mid-market and enterprise customers
- Size
- Geography
- North America
- Ownership
- Situation
The Prompt
You are the financial advisor to Kirkstall Communications, Inc. The plan is solicited, every impaired class has voted to accept, and the confirmation hearing is a week away.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
Reconcile the cash the company actually emerges with
PART 2
Build the pro forma emergence balance sheet under fresh-start reporting
PART 3
Compute what each structure can service
PART 4
Sensitize coverage against the plan
PART 5
Carry liquidity as a percentage of revenue against the company's own history
PART 6
Distribute the new equity and compute what each class recovers
PART 7
Value the pension termination claim twice and price the difference
PART 8
Decide what happens to the net operating loss
PART 9
The two documents
Attempt It First
Blank modelling template
The answer model with every produced cell cleared — the shell you build your attempt in. Work it in Excel against the clock, then check yourself against the model answer below.
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck, Excel model and memo are in the solution set below.
- 01
Read the backstop commitment before you build anything
- 02
Get the sources right before you get the uses right
- 03
Pick the coverage ratio the exit facility actually tests
- 04
Sensitize against the plan, not around it
- 05
Walk the balance sheet in columns that foot
- 06
Treat the pension gap as an ownership question, not a cash question
- 07
Make the feasibility finding the Court will have to make
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
The emergence cash reconciliation
A bridge from cash on hand at the effective date to the cash the reorganized company actually starts with. Sources are cash on hand and any new money that arrives in cash — a rights offering, cash-pay exit debt. Take-back paper issued to a class in satisfaction of its claim is not a source, because no cash arrives. Uses are everything the plan must pay on or shortly after the effective date: the debtor-in-possession facility, any secured facility paid in full, administrative and priority claims, professional fees, cure costs on assumed contracts, plan distributions payable in cash, and the fees on the exit financing itself.
Fresh-start reporting under ASC 852-10
Fresh-start reporting applies when two conditions are met: the reorganization value of the assets is less than the total of all post-petition liabilities and allowed claims, and holders of the existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity. When it applies, the emerging entity is a new reporting entity: assets and liabilities are restated to fair value, the accumulated deficit is reset to zero, and the excess of reorganization value over the fair value of identifiable assets is recorded as goodwill. The most commonly missed consequence is that depreciation and amortization changes, sometimes sharply, and the first full year's earnings are therefore not comparable to the last.
Fixed charge coverage, and why it rather than interest coverage
Interest coverage divides earnings by interest. Fixed charge coverage divides earnings less capital expenditure less cash taxes by interest plus mandatory amortization. The two agree in a business that does not spend on assets and diverge sharply in one that does. Exit facilities test the second, because a borrower that cannot fund its maintenance capital expenditure out of operations is a borrower that will be back. Where capital expenditure is a large share of earnings, quoting interest coverage alone is the wrong ratio.
Section 163(j) and the cap on the tax shield
Business interest expense is deductible only to the extent of business interest income plus 30% of adjusted taxable income. Above that threshold, incremental interest carries no current tax shield, so the after-tax cost of each additional dollar of debt jumps. In an emergence structure this shows up as a kink: cash taxes fall as leverage rises until interest reaches the cap, and then stop falling, which means the most levered structure is more expensive on an after-tax basis than the pre-tax coupon suggests.
The pension termination claim, and why it has two values
In a distress termination under ERISA section 4041(c), the PBGC becomes a creditor for the plan's unfunded benefit liabilities, and that claim is a general unsecured claim. The sponsor's actuary values the obligation on the statutory funding segment rates; the PBGC values it on its own prudent investor assumptions, which are calibrated to what it would cost to buy annuities in the private market. The prudent investor rate is lower, so the PBGC's liability is larger. The gap is an argument about the discount rate rather than about the benefits, which do not change, and in a class paid in equity it moves every recovery percentage in the class.
Section 382(l)(5) versus section 382(l)(6)
A plan of reorganization almost always effects an ownership change, which limits the use of net operating losses. Section 382(l)(5) offers no annual limitation at all if qualifying creditors and shareholders end up owning at least 50% of the reorganized company — but if a second ownership change occurs within two years, the entire carryforward is eliminated. Section 382(l)(6) imposes an annual limitation equal to the reorganization equity value multiplied by the long-term tax-exempt rate, and has no cliff. The choice turns on how stable the post-emergence cap table actually is, and a cap table full of financial investors who intend to syndicate is not stable.
Feasibility under section 1129(a)(11)
A court may confirm a plan only if confirmation is not likely to be followed by liquidation or the need for further financial reorganization. It is a low bar in practice and it is not a nullity. A structure whose own financial covenant is breached at the first test date on the debtor's own projections is a structure a court can be asked to look at twice. It is also the reason feasibility is an advisor's question as well as a lawyer's, because the arithmetic that answers it comes out of the model.
The rights offering, the backstop and the subscription discount
New money equity in a plan is usually raised through a rights offering to one or more classes, backstopped by a group that commits to buy whatever is not subscribed in exchange for a fee. Shares are offered at a discount to plan equity value, which is what makes the offering clear, and the discount plus the backstop fee is the cost of the money. The backstop commitment is also a hard constraint on structure: an exit structure that needs more equity than anyone has agreed to backstop is not an alternative, however attractive its coverage looks.
Take-back paper
Debt issued to a prepetition class in partial satisfaction of its claim, rather than sold for cash. It appears in the pro forma capital structure and in the recovery to the class that receives it, and it appears nowhere in the sources of cash. It is also the reason a first lien class can prefer a more levered exit: take-back paper is recovery at par, and a larger take-back is a larger recovery on paper regardless of whether the reorganized company can service it.
Liquidity as a percentage of revenue
Cash plus undrawn revolver capacity, divided by last-twelve-months revenue. It is the crude ratio the market applies to a newly reorganized issuer, and its value is that it is comparable across capital structures and against the issuer's own history. A company that entered a case running liquidity at a low single-digit percentage of revenue and emerges in the low teens has changed something real; a company that emerges where it started has refinanced rather than restructured.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck, Excel model and memo, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Emergence cash reconciliation
- —Pro-forma emergence balance sheet scenarios
- —Pro-forma debt by weighted average cost of debt grid
- —Liquidity as a percentage of revenue
- —Fixed charge coverage
- —Pension termination claims and discount rate selection
Answer Deck
Full model answer, banker-formatted
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model, the memo and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Memo (PDF) and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Kirkstall — Emergence Capital Structure
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Do I need to value the company?
No, and doing it is a mistake. The reorganization enterprise value is stated in an approved disclosure statement that every creditor received and nobody objected to. Your job is to take it as given, derive the reorganization equity value under each structure from it, and spend the time you would have spent on a valuation on the question that is actually open. If you want to test the value, test it the way the case does: solve for the earnings each structure needs and see how far that is from the plan.
What is the difference between plan effects and fresh-start adjustments?
Plan effects are the transactions the plan itself causes: claims discharged, new debt and new equity issued, cash paid out, the debtor-in-possession facility repaid. Fresh-start adjustments are the accounting consequence of becoming a new reporting entity: assets and liabilities restated to fair value and the equity account reset. Keeping them in separate columns is how you catch a plan payment recorded twice, or a revaluation booked against cash.
Why does the pension claim have two numbers, and which one is right?
Because two parties are discounting the same stream of benefits at two different rates. The sponsor's actuary uses the statutory funding segment rates; the PBGC uses its own prudent investor assumptions, which are lower and therefore produce a larger liability. Neither is arithmetically wrong. A strong answer asks which is likely to govern, what it costs to concede it, and what it costs to litigate it against a counterparty that has been upheld on this point far more often than it has been rejected.
How should I lay out the sensitivity grid?
Pick two axes that are independent. Debt against cost of debt is not: the only thing those two jointly determine is the dollar interest bill, so every cell is a function of their product and the grid is constant along its anti-diagonals. Debt against Adjusted EBITDA is, because one enters the denominator and the other the numerator. Then make the center cell reproduce your base case, so the reader can locate themselves on the page before they read anything off it.
Is a fixed charge coverage ratio below the covenant automatically fatal?
Not automatically, but it is close to it at emergence. A covenant breach on the debtor's own projections at the first test date is not a downside case; it is the plan. It is also a feasibility problem under section 1129(a)(11) rather than only a lender problem. If you want to recommend a structure in that position, you have to explain what changes before the test date and why the lenders would agree to it, and that explanation is usually harder to write than the alternative recommendation.
How much of the 120 minutes should go on the workbook?
Most of it. The reconciliation, the balance sheet walk, the coverage build, the grid and the distributions are the exercise, and they are gated on each other, so an error in the reconciliation propagates. Read the materials first — the backstop cap and the pension claim are both in them and both change what you build — then model, then write. The presentation and the memorandum should be headline pages, not a finished book.
What legal and accounting claims does a strong answer actually make?
A small number, stated exactly. Both fresh-start conditions and the fact that the emerging entity is a new reporting entity; the section 163(j) limit and what it does to the marginal cost of debt; the distress termination provision and the basis on which the PBGC values its claim; the two section 382 regimes and the cliff in one of them; and feasibility under section 1129(a)(11). Anything that cannot be stated cleanly is better left out — a wrong legal claim in a confirmation-stage memorandum is worse than a missing one.
Why does the first lien class prefer the most levered structure?
Because take-back paper is recovery at par and equity is recovery at plan value. A larger take-back and a smaller equity pie can raise the class's stated recovery even as it lowers the reorganized company's ability to pay. That is not irrational on the class's part, and it is not a reason to follow it. The class holds a claim that is impaired either way, and the difference between a recovery on paper and a recovery in fact is a second restructuring.
About This Chapter 11 Emergence / Exit Financing Case Study
Chapter 11 Emergence / Exit Financing case study for investment banking interviews. 120-minute format covering emergence cash reconciliation, pro-forma emergence balance sheet scenarios, pro-forma debt by weighted average cost of debt grid. Includes the full prompt, a model answer deck, a tied-out Excel model, a written memo and an audio walkthrough.
This case study sits in Investment Banking, under Restructuring & Special Situations. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Memo
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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