Where loan-to-own was a major theme during the early grueling months of the ongoing default cycle when liquidity was scarce and issuers were unable to raise exit financing, the name of the game in today's more liquid environment is more loan-to-buy. Indeed, New York hedge fund Paulson & Co.'s proposal to purchase a 45% equity stake in Yellow Pages publisher Idearc Inc. is the second time in recent months an investor group has used its prepetition debt position to execute a bargain price "exit LBO." The first was private equity firm Apollo Management LP's purchase of Pliant Corp., a packaging products maker.

Though the destination is similar, the route Paulson took in Idearc was different than that taken by Apollo in Pliant. In broad terms, Paulson is trying to buy its stake in Idearc from its fellow prepetition debtholders at a total equity value of $200 million, where Apollo -- along with portfolio company Berry Plastics Corp. -- purchased Pliant's equity through a rights offering that infused money directly into the company and, thus, facilitated the exit.

In Idearc's case, the Yellow Pages publisher was spun off by Verizon Communications Inc. in late 2006. The transaction was backed by a $6.5 billion loan package -- comprising a $250 million revolving credit, a $1.5 billion amortizing term loan and a $4.75 billion back-end loaded term loan -- and $2.85 billion of bonds. Idearc used the proceeds to refinance debt and pay a $2 billion dividend to Verizon.

Fast forward to March 2009, and Idearc filed for Chapter 11. Bruised by the severe advertising slump and competition from the Web, Idearc's cash flow collapsed. In 2009, the company will post an estimated $805 million of Ebitda, according to a financial projection by Moelis & Co. LLC. That's about half what Idearc generated during the 12 months ended June 2006, the period on which the original capital structure was based.

Looking ahead, Moelis is forecasting a base case and opportunity case Ebitda:

These estimates, by the way, are viewed by some holders as wildly understated. Either way, however, Idearc's reorganization will wipe out about $7 billion of prepetition debt, with the first-lien lenders receiving an unclear -- but likely small -- cash payment, a new $2.75 billion exit facility and 95% of the emerged entity's common stock in exchange for their $6.3 billion of prepetition claims (this excludes a $250 million adequate protection payment from earlier in the bankruptcy).

Of course, some holders -- particularly collateralized loan obligations -- are more keen to get cash dollars than stock. And that's where Paulson comes in. The hedge fund will buy up to 45% of the stock from fellow holders at a $200 million aggregate value, putting a total enterprise value of $2.95 billion on Idearc, implying the following multiples:

The market is pricing this settlement at 49 cents on the dollar, according to sources, or a total enterprise value of about $3.09 billion, implying that Paulson is buying the equity for about 59 cents on the dollar. The math here shows the market is valuing the equity at $337 million -- or $3.09 billion less $2.75 billion of debt -- versus the $200 million value Paulson is paying. Not for nothing, Bennett Management Corp. stepped up with an equity offer valued at $225 million to $250 million.

The Paulson offer also looks cheap relative to recent leveraged buyout comps. Based on Standard & Poor's Leveraged Commentary & Data research, the recent set of M&A deals has purchase multiples ranging from 5.6 times to 9.7 times, with an average of 7.3 times. Of course, Idearc is in a wounded sector that would unlikely be financed with much leverage even in today's more robust lending climate.

To circle back to Pliant, Apollo's implied multiple was also a relatively low 5.6 times, showing the power of the exit LBO for holders with the prepetition stake, and financial muscle, to pull it off.

Steven Miller manages the Standard & Poor's Leveraged Commentary & Data business.