§ 01
| Step | Action | Goal |
|---|---|---|
| 1. Accumulate debt | Buy fulcrum debt at deep discount | Build a blocking/controlling position |
| 2. Influence process | Join creditor committee, propose plan terms | Shape the reorganization outcome |
| 3. Convert to equity | Exchange debt for majority equity in reorganized co | Own the company at a fraction of EV |
| 4. Operate and exit | Improve operations, then sell or IPO | Realize return on implied equity cost |
§ 02
Implied Equity Cost = Debt Purchase Price / Equity Conversion %
§ 03
A blocking position (typically 1/3 + 1 of a creditor class) gives you veto power over any plan you don’t like. A controlling position (2/3 of the class) lets you force your preferred plan through the vote.
§ 04
When a major restructuring is announced, look at who holds the key debt positions. Distressed funds like Apollo, Oaktree, and Elliott often accumulate fulcrum debt to execute loan-to-own strategies.
§ 05
An investor buys $200M face value of fulcrum debt at $0.35 ($70M cost) and converts to 60% equity of the reorganized company valued at $300M. What’s the return?
§ 06
§ 07
Loan-to-own: a distressed investor buys a company's term loan at 40 cents. Goal?
Five questions · AI feedback
Sit with the ideas.
A private equity-backed company has: $600M first lien term loan, $250M second lien notes, $400M unsecured bonds, and sponsor equity (worthless). Enterprise value estimate: $750M. A distressed fund buys $200M face value of the second lien notes at 35 cents ($70M cost). In the restructuring, first lien gets par, second lien converts to 80% of the new equity. The reorganized company has $300M of exit debt. What is the fund's return?
Why: