How each creditor class is treated
| Creditor Class | Treatment | Recovery |
|---|---|---|
| Senior Secured (above fulcrum) | Paid in full (par + accrued) | 100% |
| Fulcrum Security | Partially impaired — receives mix of new debt, equity, cash | 20–80% (the variable) |
| Junior/Unsecured (below fulcrum) | Receives little or nothing | 0–20% typically |
| Equity | Cancelled in most cases | 0% |
Why the fulcrum straddles the value break
The fulcrum security is the investment opportunity. It’s the class that straddles the value break point — above it, creditors are made whole; below it, creditors get nothing. Identifying the fulcrum is the first step in distressed investing.
Waterfall reorganized value through the capital structure
In a bankruptcy case, estimate the company’s reorganized enterprise value and waterfall it through the capital structure. Where does the value run out? That layer is the fulcrum.
Locate the fulcrum by walking the priority stack
A company has $500M senior secured debt, $300M unsecured notes, and $200M subordinated bonds. Reorganized value is estimated at $650M. What’s the fulcrum security?
Why the reorganized value estimate is everything
The tranche where value runs out
In a Chapter 11 plan: senior secured gets 95% recovery, subordinated gets 30%, equity gets wiped. The 'fulcrum security' is:
Check your understanding
Sit with the ideas.
A company has $400M secured debt, $500M senior unsecured bonds, and $300M subordinated notes. The reorganization plan values the enterprise at $700M. The plan proposes: secured gets new par debt, senior unsecured gets 60% of new equity, subordinated gets nothing. Which class is the fulcrum security, and why might the subordinated noteholders object?
Why: