Debt-for-equity restructuring: a shipyard owes Rs 1,200 crore on Rs 100 crore of EBITDA. Lenders cut debt to 4x and take 70% of the equity, with enterprise value at 7x. What do the lenders recover in debt and equity, and what do the old shareholders keep?

Lenders recover about 50.8%: Rs 400 crore of new debt plus Rs 210 crore of equity on Rs 1,200 crore owed. At 7x the business is worth Rs 700 crore, so after Rs 400 crore of debt the equity is worth Rs 300 crore, 70% to lenders and Rs 90 crore to the old shareholders. Lenders give up 7.5 points against strict priority to avoid a court route worth 48.3%. Their recovery depends on what the equity is really worth.

A family that cannot pay a Rs 12 lakh loan on a shop worth Rs 7 lakh can let the bank seize and sell it, or agree that the bank keeps a smaller loan and takes a share of the shop. A debt-for-equity swap converts the debt the business cannot carry into ownership, so the lenders swap a claim that will not be paid for a share of the value that does exist. Rs 1,200 crore of debt against Rs 700 crore of value is Rs 500 crore that cannot be repaid by anyone. After the swap, the company owes Rs 400 crore, 4x EBITDA, which it can service, and the equity is worth Rs 300 crore.

Work it per Rs 100 of claim, because lenders rank equally. Each Rs 100 of old debt becomes Rs 33.3 of new debt and a share of the equity worth Rs 17.5, a recovery of Rs 50.8, or 50.8%. The debt part is a contractual claim; the equity part is a valuation. A bank that holds Rs 300 crore of the old loans walks away with Rs 100 crore of new loans and 17.5% of the company, and must decide whether to hold the shares or sell them, usually at a discount, to a special situations fund.

Under strict priority they would not. The lenders are owed more than the business is worth, so in a court-led process they would take all the equity and recover Rs 700 crore, 58.3%. Giving the family Rs 90 crore costs the lenders 7.5 points of recovery, and they pay it because the court route is worse: two years, lost orders, value down to Rs 600 crore and Rs 20 crore of costs, 48.3%. The family's consent, its relationships with naval and port customers, and the speed of an out-of-court deal are worth more to the lenders than the 30%. That is the arithmetic of most consensual restructurings: junior holders keep something because their cooperation preserves value.

Then the risk the lenders keep. Recovery depends on the value of the equity: at 6x it falls to 45%, at 8x it rises to 57%, and every turn of EBITDA multiple moves it by about 6 points. A lender who expects the shipbuilding cycle to turn should hold the shares; one who needs to clean its books should sell them. And 4x of new debt is only sustainable if the overrun contracts are finished; the first question in diligence is how much of the order book is still fixed price.