Tool 02 · the lab · Read: Ch. 19 — Uptiers · Ch. 31 — Serta

Uptier Exchange Solver

The arithmetic of an uptier. Participating lenders accept a principal haircut in exchange for priority; excluded lenders keep their full claim and lose their place in the queue. This solver computes the exchange ratio, rebuilds the post-transaction stack, and runs the waterfall so you can see the recovery gap the transaction creates.

01 Pre-transaction structure

First lien outstanding ($M)

Serta's 2016 credit agreement provided $1.95bn of first lien loans.

Second lien outstanding ($M)

And $450mm of second lien, for $2.4bn total.

02 The transaction

New money, first-out ($M)

Existing debt exchanged ($M)

Face amount of first and second lien surrendered by participating lenders.

New second-out issued ($M)

What they received back. The gap is the haircut they accepted for priority.

Enterprise value at restructuring ($M)

03 The result

—

exchange ratio — cents of new debt per dollar surrendered

05 Recovery by tranche after the uptier

paid in full partial wiped out full face claim

Post-transaction stack	Claim	Recovery	%

Grey bar = full face claim. The new tranches are satisfied first; whatever remains reaches the excluded lenders holding the original instrument.

Reading this model

Exchange ratio: New debt received per dollar of old debt surrendered. Serta's was about 73 cents. Read it as a revealed belief: nobody accepts a 27% principal haircut on a claim they expect to recover at par. The ratio is the participants' own valuation of their old position.
Post-transaction stack: The new priority order. New money sits first-out, the exchange tranche second-out, and the non-participants keep their original instrument now ranking behind both — the same paper they held the week before, subordinated by an amendment passed by majority vote.
Excluded recovery, as transacted: What the non-participants get after the new tranches are satisfied. This is the figure that determines whether anyone sues.
Excluded recovery, had it been pro rata: The counterfactual: enterprise value spread across the whole pre-transaction stack without the priority shift. The difference between these two lines is the value the transaction moved between creditors holding legally identical paper.
Value shifted: The quantity that gets litigated. In Serta the model returns roughly $375mm at a $1.4bn enterprise value; the Houston court awarded approximately $400mm on remand. That the two are close is not a coincidence — damages in these cases are essentially this arithmetic.
What to look for: Whether the transaction is permitted turns entirely on two provisions: the pro rata sharing clause and its exceptions (Serta: §2.18(c) and the §9.05(g) open market purchase carve-out), and the sacred rights in the amendment section. Mitel had almost the same economics and survived, because its agreement was drafted differently. Pull both from EDGAR before forming a view.

The exercise

With the Serta preset loaded, note the recovery on the excluded lenders' remaining claim. Then raise enterprise value until they recover par. That number is what the excluded lenders had to believe the business was worth for the transaction to be harmless — and the gap between it and any defensible valuation is what the litigation was about. The Houston court ultimately put damages at roughly $400mm.