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  1. 062A company has an enterprise value of Rs 1,000 crore against senior secured debt of Rs 500 crore, senior unsecured debt of Rs 300 crore and subordinated debt of Rs 150 crore. Enterprise value then falls 30%. What does each layer recover, which layer is the fulcrum, and at what enterprise value would the equity start to be worth something?Capital structure and recoveryCoreKKRNew York · 2025

    Try it first

    After the fall, which layer is the fulcrum?

    Show the worked solution

    At Rs 700 crore, senior secured recovers 100%, senior unsecured 66.7% and the subordinated debt nothing, so the senior unsecured layer is the fulcrum. Value is paid down the stack in order: Rs 500 crore to the secured lenders leaves Rs 200 crore for Rs 300 crore of unsecured claims, and nothing below. The equity is worth something only once enterprise value exceeds total debt of Rs 950 crore.

    How is value shared out when it falls short of the debt?

    Picture water poured into a stack of glasses, each filling completely before any spills into the next. In a recovery, value pays each layer of the capital structure in full, in order of priority, before anything reaches the next layer down. The senior secured lenders' glass holds Rs 500 crore, the senior unsecured Rs 300 crore, the subordinated Rs 150 crore, and the equity takes whatever is left. Pour in Rs 700 crore and watch where it stops.

    Value fills the stack from the bottom; the fulcrum is where it runs outCoveredSenior securedRs 500 croreSenior unsecuredRs 300 croreSubordinatedRs 150 croreEquityEV 1,000, beforeEV 700, after the fallRecovery at Rs 700 crore100%66.7%: 200 of 300fulcrum0%equity also 0Claims, Rs crore, most senior at the bottom
    At Rs 700 crore of enterprise value, the Rs 500 crore senior secured layer is covered in full, the senior unsecured layer receives Rs 200 crore of its Rs 300 crore, 66.7%, and the subordinated debt and equity receive nothing, which makes senior unsecured the fulcrum.
    LayerClaimAt EV Rs 1,000 croreAt EV Rs 700 crore
    Senior secured500500 (100%)500 (100%)
    Senior unsecured300300 (100%)200 (66.7%)
    Subordinated150150 (100%)0 (0%)
    Equity500
    Total9501,000700
    Rs crore, recovery in brackets. At Rs 1,000 crore every debt layer is paid in full and the equity is worth Rs 50 crore; at Rs 700 crore the senior unsecured layer recovers 66.7% and everything below it is wiped out.

    Why does the fulcrum matter to a credit investor?

    The fulcrum securityThe most senior layer of the capital structure that the company value does not cover in full, so it is likely to receive the equity in a restructuring. is the layer where the value runs out. It usually ends up owning the business in a restructuring, because the layers above are paid in full and the layers below are wiped out. Here the senior unsecured lenders would likely exchange their Rs 300 crore of claims for most of the new equity. Distressed investors buy the fulcrum because its value moves most with the enterprise value: between Rs 500 and Rs 800 crore, every extra Rs 1 crore goes straight to it.

    At what value does the equity come back to life?

    The equity is out of the money until enterprise value covers every debt claim, Rs 500 plus 300 plus 150 crore, which is Rs 950 crore. At the original Rs 1,000 crore it was worth only Rs 50 crore, 5% of enterprise value, which is why a 30% fall wiped it out and went on through the subordinated layer too. The limit: this is a strict priority waterfall; in real restructurings junior classes often receive a small share to win their votes, and claims include accrued interest and fees, so treat these recoveries as the starting point of a negotiation.

    Where candidates lose it

    The common slip is sharing the loss pro rata: Rs 700 crore over Rs 950 crore of debt is 73.7% for everyone. That ignores priority, which is the whole point of a capital structure question.

    The second is naming the subordinated debt as the fulcrum because it is the first layer to lose everything. The fulcrum is the layer where the value line lands, the one that is only partly covered: here the senior unsecured.

    What the interviewer asks next

    • Enterprise value falls to Rs 450 crore. What does each layer recover now?
    • The senior secured lenders are also owed Rs 30 crore of accrued interest. Does the fulcrum move?
    • Where would the senior unsecured bonds trade if the market expects Rs 700 crore of value in a restructuring a year from now?

    Asked at KKR, Distressed Debt, New York, 2025 (Wall Street Oasis): What are your weaknesses? A capital structure question with enterprise value.