A steel company's finance subsidiary issued guaranteed notes and lent the money on to the operating company. Work out the noteholders' recovery with and without the double dip, and what it does to everyone else.

The double dip lifts the noteholders from 60% to 90% and cuts everyone else from 60% to 45%. With one claim, Rs 900 crore is shared across Rs 1,500 crore of claims. With two Rs 500 crore claims, one through the guarantee and one through the finance subsidiary's intercompany loan, claims total Rs 2,000 crore and each recovers 45%, so the noteholders collect Rs 450 crore. That Rs 150 crore comes straight out of the other creditors' pocket.

Because they really do hold two separate rights against the same company. The guarantee lets the noteholders claim on Dhanvik Steel directly, and the intercompany loan lets Dhanvik Finance claim on Dhanvik Steel too; Dhanvik Finance then passes every rupee it recovers to the noteholders, its only creditors. That is the double dipA structure that gives one group of creditors two claims of equal rank against the same company for the same money.. Picture an estate being shared out in proportion to claims, and one creditor arriving with two IOUs for the same loan, one in his own name and one through a company he owns. He gets two slices of the cake.

Without the double dip, the claims on Dhanvik Steel are Rs 500 crore for the notes and Rs 1,000 crore for everyone else: Rs 1,500 crore against Rs 900 crore of value, 60% each. The noteholders get Rs 300 crore. With it, the pool is the same Rs 900 crore but claims are Rs 2,000 crore, so the rate falls to 45%; the noteholders collect it twice, Rs 450 crore, while other creditors get Rs 450 crore instead of Rs 600 crore. No value is created. Rs 150 crore simply changes hands.

There is a hard ceiling: no creditor can recover more than it is owed, so the two claims together stop at 100%. Here that binds only if Dhanvik Steel were worth Rs 1,000 crore or more, where 50% on each claim already pays the notes in full. Below that, the other creditors attack the plumbing. They argue the intercompany loan should be treated as equity, or that the guarantee was given for no benefit to Dhanvik Steel, or that the two claims are really one debt counted twice. How those arguments fare depends on the law where the companies sit, so name the arguments, not the outcome.

This is why the structure turns up in liability management deals, often alongside a drop-down of assets into a new subsidiary. New money is lent through a finance vehicle, the vehicle lends it on, and the lender takes a guarantee as well. In an interview, draw the entity chart first and count the claims second; the arithmetic is easy once the arrows are right.