In bankruptcy, claims are grouped according to similarity (called classification). These groupings are based upon various factors, such as identity of the obligor (claims against the parent entity vs. their subsidiaries may be separately classified), collateral interests (secured vs. unsecured), senior vs. subordinated, post-petition vs. pre-petition, claims entitled to certain priorities (such as government tax claims), and so forth. Interests are also grouped in the same manner, with preferred stock and common stock having their own classes. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders. A plan of reorganization does not have to provide for the full payment of all prepetition bankruptcy debts (and usually does not). Certain classes of creditors may be deemed "impaired" (i.e., whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan), while other classes may be deemed "unimpaired" (i.e., whose claims will be paid in full in cash or otherwise reinstated on its original terms).
A plan of reorganization does not have to provide for the full payment of all prepetition bankruptcy debts (and usually does not). Certain classes of creditors may be deemed "impaired" (i.e., whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan), while other classes may be deemed "unimpaired" (i.e., whose claims will be paid in full in cash or otherwise reinstated on its original terms).
In theory, there is a strict hierarchy of payment among claims of differing priorities (called the "absolute priority rule"). This well-established bankruptcy principle states that claim holders with higher priority should receive 100% of their claim in full before the next (lower priority) class receives any portion of the reorganization proceeds. In practice, it is common for chapter 11 bankruptcies to violate the absolute priority rule. For example, "give ups" or "carve-outs" by senior classes of creditors to achieve confirmation of a plan have become an increasingly common feature of the chapter 11 process, as stakeholders strive to avoid disputes that can prolong the bankruptcy case and drain estate assets by driving up administrative costs.
In terms of recovery rates, bank debt recovered on average of 72% of the amount owed in the 2002-2003 downturn (according to Standard & Poor's LossStats Database). Senior unsecured bonds recovered 29% on average of the amount owed (a materially lower yield due to lack of collateral/security). Subordinated unsecured bonds recovered 21% on average of the amount owed (a lower recovery compared to senior unsecured bonds due to their lower priority). In the current environment, recovery rates across the capital structure are expected to be materially lower compared to prior distressed periods due to (1) higher average secured debt levels in today's corporate capital structures (a significant amount of second lien senior secured debt was issued in the 2004-2007 period), (2) materially weaker (i.e., more borrower friendly) credit agreement terms (including the proliferation of no-covenant and covenant-lite structures), and (3) expectations for a deeper and longer recession compared to the last few economic downturns.