Uploaded a document I pulled from the Mattress Firm bankruptcy that illustrates the cap, for those who want an example. https://drive.google.com/open?id=14mfF7oZh-ng1hwrbOfewRTREaQ4L8Vdl …
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Liz, this goes back the Cake Factory argument, right? I.e., that most of the PV of lease liabilities is unrecoverable in bankruptcy?
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Yes on
$CAKE. Specifically, it’s capped at the greater of 1 year or 15% of the remaining term up to 3 years. For long term leases this will tend to be way below the PV of the remaining liability.
End of conversation
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Ok but when looking at it from the equity perspective, once you get to this point it’s worthless.
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From equity sure but if you’re a creditor you’ll screw up your waterfall and tend to underestimate recovery rate if you don’t account for the cap.
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I also saw this with smaller credit unions (like say in Las Vegas). Banks don't REALLY want to own thousands of used cars so they will likely change terms. Debt is not debt ;)
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Lord, I’ve arguing this for years. Nice ‘tis finally gaining exposure (albeit after accounting rules have decided that we needed op leases on the B/S). So it goes.
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