Case 15-5
Trouble at the Resort
Resort Co. (the “Company”) is a private company that operates luxury hotel properties.
As of December 31, 2010, Resort Co. had $432 million in uncollateralized term loans
(the “Original Debt”) outstanding with two lenders, Bank A ($129.6 million) and Bank B
($302.4 million). Note that these are not participating loans. Further, issuance costs associated with the Original Debt in the amount of $3 million remained unamortized as of
December 31, 2010 ($900,000 and $2.1 million for the loans held by Bank A and Bank
B, respectively).
As a result of lower than expected travel during the holiday season, the Company projected a short-term cash flow shortage and would not be able to meet the short-term requirements of the Original Debt. In addition, the Company defaulted on a separate debt instrument with Bank C, which resulted in a cross default on the Original Debt held by
Bank A and Bank B. On January 1, 2011, Resort Co. restructured and amended the
Original Debt (the “Restructuring”) with Bank A and Bank B. As part of the terms of amending the Original Debt:
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The Company sold its 50 percent investment in Resort P in exchange for $250 million, which was used to pay down the loan balance that existed before the amendment. This reduced the Original Debt balance from $432 million to $182 million. •

The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The modified interest rate is not considered a below market rate for a debt offering with similar risk.

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The Original Debt required annual payments consisting of principal and interest of $16.8 million and $39.2 million to Bank A and Bank B, respectively.

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The post-modification debt (the “Modified Debt”) does not require periodic payments of principal and interest; rather, all principal and