Glossary — Turnaround and Distressed Investing

Distress Fundamentals

Financial Distress Ch 01: A condition in which a company cannot service its obligations as they come due, or can only do so by depleting liquidity it needs to operate.
Operational Distress Ch 01: Underperformance at the business level — margin erosion, share loss, cost structure mismatch — as distinct from a purely balance-sheet problem.
Balance Sheet Distress Ch 01: A capital structure too large or too short-dated for an otherwise viable business. The classic candidate for restructuring rather than liquidation.
Maturity Wall Ch 07: A concentration of debt maturities in a short window, forcing refinancing on whatever terms the market offers at that moment.
Liquidity Runway Ch 07: The number of weeks or months a company can operate before it exhausts available cash and undrawn revolver capacity.
Altman Z-Score Ch 01: A multi-variable bankruptcy prediction model developed by Edward Altman. Useful as a screen, unreliable as a conclusion.

Capital Structure

Capital Structure Ch 02: The full stack of claims against a business, ordered by priority — from super-senior through secured, unsecured, subordinated, and equity.
Absolute Priority Rule (APR) Ch 02: The principle that senior classes must be paid in full before junior classes receive anything. Section 1129(b) codifies it; practice bends it.
Fulcrum Security Ch 03: The tranche at which enterprise value runs out — the layer that converts to equity in a reorganisation and therefore controls the outcome.
First Lien / Second Lien Ch 02: Secured debt tranches ranked by priority against the same collateral pool, governed between themselves by an intercreditor agreement.
Structural Subordination Ch 02: The disadvantage of holding debt at a parent entity when the operating assets and their direct creditors sit at a subsidiary.
Intercreditor Agreement Ch 02: The contract that governs relative rights between lien classes — standstills, payment blockages, and voting on collateral.
Unitranche Ch 02: A single blended facility that combines senior and junior economics, with the priority split handled privately via an agreement among lenders.

Credit Analysis

Leverage Ratio Ch 06: Total or net debt divided by EBITDA. The headline gearing measure, and the most commonly manipulated one.
Interest Coverage Ch 07: EBITDA (or EBITDA less capex) divided by cash interest expense. Often more diagnostic than leverage in a rising-rate environment.
Adjusted EBITDA Ch 06: EBITDA after add-backs for items management deems non-recurring. The gap between adjusted and actual EBITDA is a primary diligence target.
Free Cash Flow Ch 06: Cash generated after capex and working capital movements. What actually services debt, as opposed to what appears on the income statement.
Covenant Ch 08: A contractual obligation in a credit agreement — maintenance covenants tested periodically, incurrence covenants tested on action.
Covenant-Lite Ch 08: A loan without maintenance financial covenants, leaving lenders without an early trigger to renegotiate. Standard in large-cap since roughly 2013.
Restricted Payment (RP) Basket Ch 08: Credit agreement capacity permitting dividends, investments, or transfers out of the credit group. The mechanism behind most collateral leakage.
Unrestricted Subsidiary Ch 08: An entity designated outside the credit group, and therefore outside lender covenants and collateral. The vehicle for a dropdown.

Valuation and Recovery

Going-Concern Value Ch 09: The value of the business as an operating enterprise, assuming it continues. The basis for most reorganisation valuations.
Liquidation Value Ch 10: The value realised by selling assets piecemeal in a wind-down. Sets the floor in the best-interests test.
Recovery Rate Ch 10: The percentage of face value a claim class receives. Driven by seniority, collateral, and enterprise value at emergence.
Waterfall Analysis Ch 10: The tranche-by-tranche allocation of enterprise value in priority order, producing recoveries by class.
Probability-Weighted Valuation Ch 09: Valuing across scenarios with explicit probabilities rather than relying on a single going-concern case.
Distress Discount Ch 09: The adjustment applied to a conventional DCF to reflect the possibility that the firm does not survive to realise its projected cash flows.

Chapter 11 Process

Automatic Stay Ch 12: Section 362's immediate injunction halting collection, litigation, and enforcement against the debtor upon filing. The core breathing-space mechanism.
Debtor-in-Possession (DIP) Ch 12: The debtor's management retaining control of the estate post-petition, subject to court and creditor oversight, rather than a trustee taking over.
First Day Declaration Ch 12: The sworn statement filed at the outset explaining the business, the causes of distress, and the relief sought. The best single document for understanding a case.
DIP Financing Ch 13: Post-petition credit, typically with superpriority status and often priming liens under Section 364, governed by an approved budget.
Cash Collateral Ch 13: Cash subject to a secured creditor's lien. The debtor may only use it with consent or a court order providing adequate protection.
Roll-Up Ch 13: A DIP feature converting pre-petition debt into post-petition superpriority debt, improving the lender's position in exchange for new money.
Adequate Protection Ch 13: Compensation to a secured creditor for diminution in its collateral value during the case — replacement liens, cash payments, or an equity cushion.
363 Sale Ch 14: A sale of estate assets outside a plan, free and clear of liens, with the liens attaching to proceeds.
Stalking Horse Ch 14: The initial bidder in a 363 process, whose bid sets the floor in exchange for bid protections such as a break-up fee.
Credit Bid Ch 14: A secured creditor's right under Section 363(k) to bid its debt rather than cash in an auction for its collateral.
Disclosure Statement Ch 15: The document containing adequate information for creditors to vote, including the liquidation analysis and projected recoveries.
Plan of Reorganization (POR) Ch 15: The document that restructures claims and interests, and upon confirmation and effectiveness, binds all parties.
Cramdown Ch 15: Confirming a plan over the dissent of an impaired class, requiring that the plan be fair and equitable and not discriminate unfairly.
Best Interests Test Ch 15: The requirement that each dissenting creditor receive at least what it would in a Chapter 7 liquidation.
Third-Party Release Ch 15: A plan provision releasing claims against non-debtors. Sharply constrained by the Supreme Court in Purdue (2024) where non-consensual.
Section 503(b)(9) Ch 16: Administrative priority for goods received by the debtor within 20 days before filing. A key lever for trade vendors.
Preference Ch 16: A transfer to a creditor within 90 days (one year for insiders) of filing that may be clawed back under Section 547.
Fraudulent Transfer Ch 16: A transfer made with intent to hinder creditors, or for less than reasonably equivalent value while insolvent. Recoverable under Section 548.
Executory Contract Ch 16: A contract with material performance remaining on both sides, which the debtor may assume or reject under Section 365.

Liability Management

Liability Management Exercise (LME) Ch 17: An out-of-court transaction that restructures obligations using capacity in existing documents, typically to the disadvantage of some creditors.
Creditor-on-Creditor Violence Ch 17: The market term for LMEs whose principal effect is to shift value between creditor groups rather than between creditors and equity.
Dropdown Ch 18: Transferring collateral to an unrestricted subsidiary outside the credit group, then borrowing against it. Named for the J.Crew transaction.
Trapdoor Ch 18: The specific chain of investment and restricted-payment baskets permitting a dropdown that the original lenders did not anticipate.
Uptier Ch 19: A transaction in which a majority lender group amends the credit agreement to permit new priming debt, then exchanges into it at the expense of excluded lenders.
Sacred Rights Ch 19: Credit agreement provisions requiring unanimous or affected-lender consent — typically pro rata sharing, principal, interest, and maturity.
Open Market Purchase Ch 19: A pro rata exception permitting a borrower to buy back its own debt. The Fifth Circuit held in Serta this means the secondary market for syndicated loans.
Double-Dip Ch 20: A structure giving a lender two independent claims against the same credit group — typically a direct claim plus a guarantee or intercompany note claim.
Cooperation Agreement Ch 20: A contract among lenders binding them not to participate in a non-pro-rata transaction without the group. The market's defensive response to LMEs.
Amend-and-Extend Ch 11: Pushing out maturities in exchange for improved pricing or terms, without altering principal. The least aggressive liability management tool.

Operational Turnaround

Chief Restructuring Officer (CRO) Ch 21: An executive appointed to lead a turnaround, typically with authority over cash and reporting directly to the board.
13-Week Cash Flow (TWCF) Ch 22: A weekly receipts-and-disbursements forecast covering a rolling quarter. The operating system of a distressed company.
Critical Vendor Ch 16: A supplier whose pre-petition claim the court permits the debtor to pay, because continued supply is essential to the business.
Trade Credit Insurance Ch 21: Coverage vendors carry against customer non-payment. Withdrawal of cover is often the event that converts distress into a liquidity crisis.
Working Capital Unwind Ch 22: The cash released or consumed as receivables, inventory, and payables normalise. Frequently the largest near-term cash lever.
Stabilisation Ch 21: The first phase of a turnaround — securing liquidity, establishing forecast credibility, and stopping cash burn before pursuing structural change.

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