Case 068Distressed and special situationsHard

A shrinking retailer's Rs 400 crore of debt trades at 60 and its equity is valued at Rs 100 crore. Across recovery, restructuring and liquidation, would you rather own the debt or the equity?

Bain CapitalBoston · 2026

The situation

Bazaarkhana Retail runs 140 value-format stores. EBITDA is Rs 60 crore and has been falling about 10% a year as shoppers move online. It owes Rs 400 crore of secured term debt, which trades at 60 per 100, so the whole issue could be bought for Rs 240 crore. The listed equity is valued at Rs 100 crore.

A special situations fund sees three outcomes over two years. Liquidation, 35%: stores close and stock and leases are sold for Rs 200 crore. Restructuring, 40%: EBITDA keeps falling to Rs 48.6 crore and the business is valued at 6.5x, Rs 316 crore, with the lenders taking it over. Recovery, 25%: a new format lifts EBITDA to Rs 80 crore, valued at 7.0x, Rs 560 crore. For simplicity assume no cash interest is paid over the two years and the lenders' claim stays at Rs 400 crore.

Your task

Work out what the debt and the equity return in each scenario and on a probability-weighted basis, find where each breaks even, and say which you would buy and at what price.

Quick check

The equity is worth something only if enterprise value exceeds Rs 400 crore. In how many of the three scenarios does it?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Buy the debt: it returns about 1.23x on a probability-weighted basis, roughly 11% a year, and loses money only below an EV of Rs 240 crore, while the equity returns about 0.40x and needs EV above Rs 500 crore just to break even. In the recovery the debt makes 1.67x, about 29% a year, an equity-like return with a floor. At 60 the debt is fair rather than cheap; for a 20% expected return the fund should pay nearer 51.

Step 1Who gets paid first, and what does that do to each payoff?

Draw the payoffs before any probability. Think of a house worth less than its mortgage: the bank gets the sale proceeds up to what it is owed, and the owner gets only what is left above that. The debt, bought for Rs 240 crore, collects every rupee of value up to Rs 400 crore, so it breaks even at an EV of Rs 240 crore and is capped at 1.67x; the equity collects nothing until EV passes Rs 400 crore and breaks even only at Rs 500 crore. Today the market values the whole company at Rs 340 crore, 5.7x falling EBITDA, which is already below the debt. That makes the debt the fulcrum securityThe most senior claim that is not covered in full by the value of the company. In a restructuring it usually converts into the new equity.: the claim that will own the company if it is restructured.

Debt bought at 60 makes money at any enterprise value above Rs 240 crore and is capped at 1.67x once the Rs 400 crore claim is covered, while the equity is worthless below Rs 400 crore and needs Rs 500 crore to break even, so two of the three scenarios sit where only the debt gets paid.

Step 2What does each instrument return in each scenario?

Now put the three outcomes through the payoffs. In liquidation the debt gets Rs 200 crore back on Rs 240 crore, 0.83x; in restructuring it gets the whole company worth Rs 316 crore, 1.32x; in recovery it is repaid in full, 1.67x. The equity is zero, zero and 1.60x. Weighted by the fund's probabilities, the debt returns 1.23x over two years and the equity 0.40x. Notice what the equity price implies: Rs 100 crore for a payoff that exists only in the recovery means the market is pricing roughly a 62% chance of it, against the fund's 25%.

Scenario	Probability	EV	Debt gets	Debt multiple	Equity gets	Equity multiple
Liquidation	35%	200	200	0.83x	0	0.00x
Restructuring	40%	316	316	1.32x	0	0.00x
Recovery	25%	560	400	1.67x	160	1.60x
Probability weighted	100%		296	1.23x	40	0.40x

Rs crore, two years out. The debt costs Rs 240 crore and the equity Rs 100 crore. Weighted by the fund's odds, the debt receives Rs 296 crore, 1.23x, and the equity Rs 40 crore, 0.40x.

Debt bought at 60 returns 0.83x, 1.32x and 1.67x across liquidation, restructuring and recovery, 1.23x weighted, while the equity is wiped out in two scenarios and returns 0.40x weighted, so the debt gives most of the upside with far less of the downside.

Step 3So which would you buy, and at what price?

The debt, with a price discipline. At 60 the debt's expected return is about 11% a year, below a special situations fund's usual 20% target, so the right move is to bid for it nearer 51 or to have a view that the recovery is more likely than 25%. The equity case rests on the recovery alone, and the cheapest way to own that recovery is through the debt: in a restructuring, the lenders convert into the new equity, so a debt buyer gets the upside of the turnaround at a price set by the downside. The limitations: this ignores the interest the debt would accrue as a claim, the cost and time of a restructuring, and the chance that a liquidation takes longer than two years, which lowers the debt's return in the worst case.

Where candidates lose it

The usual loss is calling the debt the safe, low-return choice and the equity the upside choice. Here the debt returns 1.67x in the recovery, more than most buyout targets, because it was bought at 60; the equity's upside exists in one scenario in three.

The second is averaging IRRs across scenarios instead of averaging cash. Weight the rupees each scenario returns, then turn the weighted rupees into a multiple and a rate.

What the interviewer asks next

The debt carries a 10% coupon that accrues to the claim if unpaid. Rework the restructuring and recovery payoffs.
A rival fund already holds 40% of the debt. How does that change your strategy?
What would you need to believe to buy the equity at Rs 100 crore?
In the restructuring, how would you value the new equity the lenders receive?

Asked at Bain Capital, Generalist, Boston, 2026 (Wall Street Oasis): Superday was 3 back to back interviews. Consisted of credit technicals and a more credit/equity focused case.

Company names and figures are illustrative.