NOI or Net Operating Income it measures the operating performance of real estate investment or a REIT. It’s calculated as the property’s gross operating income minus operating expenses . Gross operating income is the realized income if the property is fully occupied and all rents are collected, minus an allowance for vacancy and credit loss. Operating expenses are all the necessary costs incurred to maintain the property, for example utilities, supplies, property management, property taxes excluding improvements and/or onetime items, as they are considered capital expenditures. NOI is often used to calculate the MV of a REIT together with the capitalization rate.

Capitalization Rate is the rate of return on a real estate investment or REIT and it’s calculated as the required rate of return (r) less the expected growth in NOI (g). We use NOI/cap rate to calculate the value of a real estate investment; therefore higher cap rates are more conservative and produce a lower market value. During the real estate peak, in 2005-2006, real estate investments used to be valued with cap rates around 7%, but now they are probably around 9%, however it’s tough to give a general number; it varies from property to property.

IRR it’s an important metric of return. In a LBO, absent dividends or additional equity infusions, the IRR equals the average annual compounded rate at which the PE firm’s original equity investment grows (to its value at the exit).

Negative Covenants they are limitations and restrictions on the borrower’s activities and represent a protection for bondholders. Some of the most common covenants are limitations on the company’s ability to incur additional debt or limits on the absolute dollar amount of debt that may be outstanding, for example debt may not exceed 60% of total capitalization. It’s common for companies that are emerging from bankruptcy to amend their existing covenants and be more restrictive, to include liquidity or EBITDA minimum maintenance requirements, restriction on dividend payouts or limits on intercompany loans.

Forbearance Agreements are agreements between the debtor and its creditors that grant the debtor a temporary waiver, 30 days for example, on the financial covenants set in the indenture with the promise to be back in compliance at the end of the waiver period. Most of the times, ongoing financial covenants defaults and forbearance agreements lead to bankruptcy or to the negotiation of a prepackaged reorganization plan under Chapter 11.

Bank Steering Committee is a group of the bank creditors generally holding the largest bank debt, which acts and represents the broader interest of the bank group as a whole.

Administrative Claims are expenses incurred by the debtor right after filing date, and are granted priority treatment under the bankruptcy code. Such claims include necessary costs of preserving the estate, wages, salaries, court costs, lawyers’ fees, accountants’ fees, trustees’ expenses, etc.

Absolute Priority the order of payment to the different classes of creditors mandated by the Bankruptcy Code. Claimants with higher priority are paid in full before other claims receive anything. Junior creditors and shareholders are paid after senior creditors. Specifically, the usual order is: first, administrative claims; second, statutory priority claims such as tax claims, rent claims, consumer deposits, and unpaid wages and benefits from before the filing; third, secured creditors’ claims; fourth, unsecured creditors’ claims and fifth, equity claims.

Section 363 Under section 363 of Bankruptcy Code, a bankruptcy trustee or debtor-in-possession may sell the bankruptcy estate’s assets through a competitive bidding process. If a lot of bids are received, the Court will then hold an auction to ensure that the debtor receives the best possible offer.

Automatic Stay the suspension of actions, such as debt collection, against the company in bankruptcy. This occurs automatically when a bankruptcy petition is filed. This action protects the debtor from creditors seeking to seize its assets. It protects some creditors in that it prevents one creditor from obtaining an excessive share of the assets of the bankrupt company to the exclusion of the other creditors.

Cash Collateral cash held and generated by the debtor during Chapter 11, and it’s subject to liens of other parties. A cash flow sweep may be established where a percentage of free cash flow generated each year it’s used to pay down debt, just like in a LBO.

Impaired vs. Unimpaired when a plan of reorganization alters the contractual rights of a class of holders of claims, that class is deemed to be impaired. For example, when certain unsecured bondholders are receiving other than interest plus principal or what’s indicated in the indenture, they become impaired. A class that is unimpaired is deemed to automatically accept a plan of reorganization.

Debtor-in-Possession (DIP) in most Chapter 11 cases, a debtor is a “Debtor-in-Possession” meaning that it continues to operate its business while retaining possession of its assets and property an no trustee is appointed to manage or operate the property of the Debtor-in-Possession.

Debtor-in-Possession (DIP) Financing is a financing vehicle available only to during Chapter 11 and it’s used to finance working capital and other needs to carry on the estate operations until the company emerges from bankruptcy. The DIP loan is usually for 18 months and sometimes it carries commitment fee, an exit fee and high interest, for example LIBOR+10%. It’s a great deal for a lender as it steps in front of every other creditor and it has priority of repayment upon emergence.

First Day Motions on the same day the Chapter 11 petition is filed, a company usually files several “first day motions” with the court. These first-day motions are designed to ensure that the company can maintain normal business operations with employees, suppliers, customers and other stakeholders. Many of the first-day motions are administrative in nature, and others are more substantive, such as a motion to continue paying compensation and benefits to employees (which is routinely granted by the Court) and a motion to obtain debtor-in-possession (DIP) financing.

Prepackaged Chapter 11 the debtor enters bankruptcy with a plan of reorganization already arranged with its creditors. In addition, the creditors have already voted and approved the plan, which is filed with the Court on filing date. This is usually the best way for a company to enter Chapter 11, as it’s shorter with fewer expenses and doesn’t require DIP Financing.

HOLDCO vs. OPCO the holding company or HOLDCO is a legal entity created for the purpose of holding together all the company’s asset. The operating company or OPCO is usually a wholly owned subsidiary of the holding company and it’s where the assets are and where the operations are carried from. From a bankruptcy point of view, it’s important to know who is the guarantor of the company’s debt.  For example, unsecured debt issued by the operating company has usually more recovery then unsecured debt issued by the holding company as the creditors are closer to the assets in an OPCO structure.

Bank Debt it represent a first lien on the company’s assets. Types of bank debt are Term Loan, Revolving Credit, Line of Credit and Letter of Credit. They usually carry a low interest rate, which is usually amended under a plan of reorganization to LIBOR+5%-6%.