Kargha Textiles' bonds trade at 40. It offers 55 of new secured bonds plus 30 of equity per 100 of face, needs 90% participation, and holdouts will rank behind the new secured debt. Should a bondholder tender?

Tender. If the offer succeeds, tendering gives 85 on plan value, perhaps 64 at market prices; holding out gives 100 only if Kargha survives to maturity and nothing if it fails again behind Rs 396 crore of new secured debt, about 50 at even odds. If the offer fails, both choices land at the 35 insolvency value. Holding out beats tendering only if you put more than about 85% on survival, and the offer is designed so that few holders will.

A claim worth 85 on paper in exchange for a bond the market values at 40. The 55 of new secured bonds is a hard claim ranking first; the 30 of equity is the plan's estimate, and in practice both will trade below their plan values, so a cautious holder should think of the package as worth something like 64, with the new bonds at 90 and the shares at half the plan value. Even so, that is well above 40, and far above the 35 that insolvency would deliver. The exchange offerA proposal by a borrower to swap its existing bonds for new securities, usually with a lower face value, to avoid a formal insolvency. is the company offering more than the market price because insolvency would cost everyone, including the shareholders who would be wiped out.

Lay the tree out before judging. Tender, offer succeeds: 85 on plan value. Tender, offer fails because fewer than 90% accept: you get your old bond back, and the likely path is insolvency at 35. Hold out, offer succeeds: you keep a 100 face bond that now ranks behind Rs 396 crore of new secured debt, so you are paid in full if Kargha survives to maturity and nothing if it fails again; at even odds that is worth about 50. Hold out, offer fails: 35. Tendering is at least as good as holding out in every branch, and strictly better when the offer succeeds, unless you are confident Kargha will survive.

Because the exchange rewrites the queue. Before the exchange, 800 of equal unsecured bonds would share a Rs 280 crore estate, 35 each. After it, Rs 396 crore of new secured bonds take the first Rs 396 crore, more than the whole estate, so the Rs 80 crore of holdout bonds recover nothing. Issuers often reinforce this with exit consents: tendering holders vote, as they leave, to strip the old bonds of their covenants and protections, so a holdout keeps a piece of paper with a worse claim than the one it started with. The design turns a free-rider problem into a game where tendering is each holder's safest move.

A holder with more than 10% of the bonds can block the offer and negotiate a better one, and that is the real game: the 90% threshold gives any large holder a veto. The company's job is to make the offer good enough that no 10% block forms, usually by sweetening early tenders with a consent fee, letting the bondholders take most of the equity, and making the subordination of holdouts explicit so that free riding is a bet, not a certainty. For a small holder, the answer stays tender. Say the limits too: the 35 recovery, the plan value of the equity and the odds of a second failure are estimates, and a real decision would test each against the business plan behind the restructuring.