Houlihan-Style Restructuring Case

Step 1: Distributable Value

Distributable Value = LTM EBITDA × Distressed EV/EBITDA Multiple + Excess Cash

Using LTM EBITDA of $80m, a 6.5x distressed multiple and $30m of excess cash:

Distributable Value = $80m × 6.5 + $30m = $520m + $30m = $550m

Distributable value is the total pool available to satisfy claims — the going-concern enterprise value plus any cash that is not needed to run the business. In a real case, administrative claims, professional fees and any DIP financing would be deducted first; here they are assumed to be covered within the multiple. Note the gap between $550m of value and $950m of face-value debt: the company is worth roughly 58% of what it owes, which is exactly why a restructuring, rather than a refinancing, is on the table.

Step 2: Recovery Waterfall by Creditor Class

Recovery ($) = MIN(Claim, Value Remaining); Recovery (%) = Recovery ($) / Claim. Starting with $550m and working down the priority ladder:

First lien: MIN($400m, $550m) = $400m → 100% (1.00). Second lien: MIN($200m, $150m) = $150m → $150m / $200m = 75% (0.75). Every class below the second lien finds $0m remaining and recovers 0% (0.00). Blended recovery across all debt = $550m / $950m = 57.9% (0.579).

The recovery waterfall is the core of any restructuring analysis: it applies the absolute priority rule, under which no junior class receives anything until every senior class is paid in full. Analysts watch two things here — whether the secured classes are covered by the collateral value, and where the value "runs out". Because the first lien is fully covered, its holders are economically indifferent to the plan's upside and typically push for a quick, low-risk process; the classes below them are the ones with real negotiating leverage over valuation.

Step 3: The Fulcrum Security

Fulcrum Security = the most senior class recovering more than 0% but less than 100%.

From the waterfall, the first lien recovers 100% and the senior unsecured notes recover 0%, so the class in between — the Second Lien Senior Secured Notes — is the fulcrum, with $200m − $150m = $50m of its claim impaired.

The fulcrum security is the tranche where the value "breaks". Its holders are not made whole in cash or new debt, so they are typically paid in the reorganized company's equity — meaning the fulcrum class becomes the new owner. This is why distressed investors try to buy the fulcrum at a discount before the restructuring: at a trading price of 55, the second lien is quoted below its modeled 75% recovery, and whoever holds it ends up controlling the business. Identifying the fulcrum correctly is the single most important output of a restructuring case; the rest of the analysis follows from it.

Step 4: Post-Reorganization Capital Structure and Ownership

New Exit Debt = Target Exit Leverage × LTM EBITDA; New Equity Value = Distributable Value − New Exit Debt.

Using 3.0x target leverage, $80m EBITDA and $550m distributable value:

New Exit Debt = 3.0 × $80m = $240m

New Equity Value = $550m − $240m = $310m

Ownership (%) = Equity Received by Class / New Equity Value. The first lien's $400m recovery is settled with $240m of new debt plus the remainder in equity; the second lien's $150m recovery is paid entirely in equity:

First lien equity = $400m − $240m = $160m → $160m / $310m = 51.6% (0.516). Second lien equity = $150m → $150m / $310m = 48.4% (0.484).

The post-reorganization capital structure is what the company actually looks like on emergence: debt falls from $950m (11.9x EBITDA) to $240m (3.0x EBITDA), and the old shareholders are wiped out. This step is where a candidate demonstrates that a restructuring is not just a haircut but a transfer of ownership — the second lien holders convert from creditors into the near-majority equity owners of a deleveraged business. In practice, the first lien often prefers to be reinstated or fully paid in new debt rather than take equity, which would push an even larger share of the equity to the fulcrum class; the assumption here is a simplification that keeps the arithmetic transparent.

Step 5: Valuation Sensitivity

Repeating Steps 1–3 at the downside (5.0x) and upside (8.0x) multiples, with $30m of excess cash added in each case:

Downside: $430m − $400m = $30m left for the second lien → $30m / $200m = 15% (0.15). Upside: $670m − $400m − $200m = $70m left for the unsecured notes → $70m / $250m = 28% (0.28), and the fulcrum moves down one class.

The valuation sensitivity explains why restructuring negotiations are really valuation disputes. Every class argues for the enterprise value that maximizes its own position: the second lien wants a low valuation so that it stays the fulcrum and captures all of the equity upside, while the senior unsecured noteholders will commission their own valuation at 8.0x to prove they are "in the money" and entitled to equity. Advisors such as Houlihan Lokey, PJT or Evercore are hired precisely to build and defend these competing valuation ranges in front of the court and the other creditor groups.

Final Results

• Distributable Value (base case): $550m
• Recovery by class: First Lien 100%, Second Lien 75%, Senior Unsecured 0%, Subordinated 0%, Equity 0%
• Fulcrum Security: Second Lien Senior Secured Notes ($50m impaired)
• Post-reorganization ownership: First Lien 51.6%, Second Lien 48.4%; new debt $240m (3.0x)
• Fulcrum shifts to the Senior Unsecured Notes only above roughly 7.1x EBITDA

This recovery analysis is the starting point for every restructuring workstream that follows: the plan of reorganization, the term sheet for the new exit debt, the negotiation between the first-lien and second-lien groups over how much equity each takes, and the distressed investor's decision on which tranche to buy at today's trading prices.

Would you like to explore how the answer changes if the second lien turns out to be undersecured — for example, if part of its collateral is shared with the first lien — or how a $60m DIP facility with super-priority status would shift every recovery down the waterfall?