In Kavish Textiles' restructuring, unsecured creditors get the new equity plus rights to buy more at a 30% discount, backstopped for a fee. What does each kind of holder recover?

Per Rs 100 of claim: about Rs 30.8 for a holder who sits out, Rs 35.2 for one who takes up the rights, and Rs 48.0 for a backstop party, against a headline of Rs 37.5. Discounted rights shares and fee shares take value per share from Rs 10 to Rs 8.22. Buying in at Rs 7 recovers that dilution and more; the backstop group adds its fee and the cheap shares others leave behind. Value moves to whoever can write the new cheque.

Imagine a housing society that needs new money for repairs and offers each flat owner extra shares at a discount. Owners who pay in get something worth more than they paid; owners who cannot, or will not, see their slice shrink. A rights offering priced below value is a transfer from those who do not subscribe to those who do. In a restructuring that matters, because the creditors who can write new cheques, usually funds, are not the same as those who cannot, such as trade creditors or small holders.

Work out value per share after the offering. Equity was Rs 150 crore at plan value; the Rs 100 crore of cash raised stays in the business, so equity is now Rs 250 crore. Shares: 15 crore plan shares, plus Rs 100 crore at Rs 7, 14.29 crore, plus the 8% fee, Rs 8 crore paid at Rs 7, 1.14 crore. That is 30.43 crore shares, so each is worth Rs 8.22, not Rs 10. The offering is fully taken up either way, because the backstop buys whatever is left.

Work per Rs 100 crore of claim, a quarter of the class. It receives 3.75 crore plan shares and the right to put in Rs 25 crore for 3.57 crore more. Sitting out: 3.75 crore shares at Rs 8.22, a recovery of Rs 30.8 crore, or 30.8 per 100. Taking up the rights: 7.32 crore shares worth Rs 60.2 crore, less Rs 25 crore of new cash, 35.2 per 100 net. The right itself is worth Rs 4.3, because it buys at Rs 7 something worth Rs 8.22.

The backstop group does best. On its Rs 100 crore of claims it subscribes like any participant, Rs 35.2 per Rs 100. It also buys the Rs 20 crore of shares the sitting-out holders leave, 2.86 crore shares at a Rs 1.22 discount each, worth Rs 3.5 crore, and takes fee shares worth Rs 9.4 crore. Its net recovery is Rs 48.0 per Rs 100, about 56% more than a holder who sat out, on the same claim.

The company needs new money and a guarantee that it arrives; the backstop provides both, and the discount and fee are its price. The fair question is whether that price is reasonable for the risk the backstop takes, and whether every creditor had the same chance to join the group. Check the size of the discount against comparable cases, whether small holders could practically participate, and whether the plan value itself is right: if Kavish is really worth more than Rs 500 crore, the discount is even more generous, which is why plan value is fought over so hard.