Consider the debt overhang. The analysis studied the possibilityof financing a new project with new equity issuance. Does the sameconclusion hold in case the new project is financed by debtissuance? Consider two cases.

a. The newly issued debt has the same level of seniority ofexisting debt, that is, any cashflows are equally shared among olddebtholders and new debtholders.

b. The newly issued debt is junior to existing debt, that is,old debtholders must be paid in full before new debtholders getanything.

c. Compare a) and b). What does this example tell you about theimportance of seniority clauses in debt covenants?

Question

Consider the debt overhang. The analysis studied the possibilityof financing a new project with new equity issuance. Does the sameconclusion hold in case the new project is financed by debtissuance? Consider two cases.

a. The newly issued debt has the same level of seniority ofexisting debt, that is, any cashflows are equally shared among olddebtholders and new debtholders.

b. The newly issued debt is junior to existing debt, that is,old debtholders must be paid in full before new debtholders getanything.

c. Compare a) and b). What does this example tell you about theimportance of seniority clauses in debt covenants?

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