A plastics company is sold for Rs 300 crore. It has secured debt, unsecured debt and preference shares. What does each class recover?

Secured debt recovers 100%, Rs 180 crore; unsecured debt recovers 80%, Rs 120 crore of Rs 150 crore; the preference shares and ordinary equity recover nothing. Value is paid strictly in order of rank, so each class is paid in full before the next receives a rupee. The money runs out inside the unsecured class, which makes it the class whose recovery moves with the price.

Think of a row of glasses stacked so that each overflows into the one below. You pour Rs 300 crore into the top glass, which holds Rs 180 crore. It fills, and Rs 120 crore spills into the next, which holds Rs 150 crore. It never fills, so nothing reaches the glasses below. A recovery waterfallThe order in which sale proceeds are paid to each class of claim, each paid in full before the next receives anything. fills each class completely before the next gets anything, and the class where the money runs out takes a partial loss. Here that is the unsecured debt, 120 out of 150.

Move the price and watch where the change lands. Only the class in which the money runs out, the fulcrumThe most senior class that is not repaid in full; small changes in value land entirely on it., feels a small change in price; the classes above are safe and the classes below stay at zero. At Rs 250 crore the unsecured class recovers Rs 70 crore, 46.7%. At Rs 350 crore the unsecured debt is paid in full and Rs 20 crore reaches the preference shares, 40% of their claim. The secured lenders get Rs 180 crore in all three cases.

Dividing Rs 300 crore across all Rs 380 crore of claims gives everyone 78.9%. That ignores rank, which is the whole point of the capital structure: secured lenders accepted a lower rate precisely because they are paid first. Proportional sharing does apply, but only within a class: if the unsecured debt were two loans of Rs 75 crore each, each would recover 80%. Say also what the base case assumes. If the secured lenders' collateral were worth less than Rs 180 crore, part of their claim would drop into the unsecured class and dilute it, and in a court process, costs and priority claims such as employee dues would come off the top first.