Tool 01 · the lab · Read: Ch. 03 — The Fulcrum Security · Ch. 10 — Recovery Analysis

Waterfall & Recovery Solver

Enter enterprise value and the capital structure in priority order. The solver allocates value down the stack, splits any undersecured claim into its secured and deficiency components, identifies the fulcrum, and tells you the enterprise value at which the fulcrum moves up or down a tranche.

01 Value available

Enterprise value ($M)

Going-concern value at emergence, or gross liquidation proceeds.

Admin & priority claims ($M)

Professional fees, DIP, 503(b)(9), priority wages. Paid before every pre-petition class.

02 Capital structure, senior first

Claim = face amount outstanding. Collateral = value of the specific collateral pool securing that tranche; leave blank or 0 for unsecured. A secured claim above its collateral value splits: secured to the collateral, deficiency ranks with unsecured.

03 Recoveries

—

the fulcrum security

05 Recovery by tranche

paid in full partial — the fulcrum no recovery full face claim

Tranche	Claim	Recovery	%

Grey bar = full face claim. Coloured bar = value actually distributed. The tranche that is part-filled is the fulcrum — it converts to the reorganised equity.

Reading this model

Enterprise value: What the business is worth as a going concern, or gross proceeds in a wind-down. It is contested: the debtor, the committee and each ad hoc group will produce different numbers, because this single input determines who receives the reorganised equity.
Admin & priority: Professional fees, the DIP, section 503(b)(9) claims for goods delivered in the twenty days pre-petition, priority wages. These are paid before every pre-petition class. In a long case they consume the fulcrum's recovery, which is why creditors expecting the equity push for speed.
Claim vs collateral: A secured claim is only secured up to the value of its collateral. Above that it splits: secured to the collateral, and the deficiency ranks alongside general unsecured claims. That deficiency dilutes the unsecured pool, which is why an undersecured first lien is bad news for everyone below it.
Recovery %: Distribution divided by face claim. Classes above the fulcrum recover par; the fulcrum recovers partially and takes the equity; classes below recover little or nothing.
The fulcrum: The tranche where value breaks. It converts to equity in a reorganisation, so controlling it means controlling the reorganised company. Class voting requires two-thirds in amount and one-half in number, so a holder with more than one-third of a class holds a blocking position.
What to look for: Run your low, base and high enterprise values and note which tranche is the fulcrum in each. A tranche that is the fulcrum across the whole range is a fundamentally different investment from one that is the fulcrum only in the base case. The boundary warnings tell you how far the value has to move for the answer to change.

The exercise

Run the same structure at three enterprise values — your low, base and high case. Note which tranche is the fulcrum in each. A tranche that is the fulcrum across the whole range is a very different investment from one that is the fulcrum only in the base case. That difference is the entire trade.