Fulcrum Security
The tranche of debt where value "breaks" in a restructuring \u2014 senior to it recovers in full, junior to it gets nothing. Identifying the fulcrum is the core distressed investing question.
Why it matters
Identifying the fulcrum is the central question in distressed debt investing. The fulcrum security holders typically end up owning the equity in the reorganized company, giving them the most upside if the business recovers. It's where the negotiating power lives in a restructuring.
How to read it
To find the fulcrum: estimate the company's enterprise value, then "waterfall" it down the capital structure from most senior to most junior. Where the value runs out is the fulcrum. Example: if EV is $500M, first lien debt is $400M, and second lien is $200M \u2014 the second lien is the fulcrum (it recovers $100M of $200M = 50%). First lien is money-good, anything below second lien gets wiped out.
Related terms
10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods
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