Enterprise value is somewhere between Rs 650 and Rs 850 crore; the stack is Rs 500 crore senior, Rs 300 crore second lien and Rs 200 crore unsecured. Where would you invest, and what is the fulcrum security's recovery range?

The second lien is the fulcrum: it recovers between 50% and 100% across the range, and it is where you invest. The senior is covered at every value in the band, so it gets paid and has no say. The unsecured gets nothing below Rs 800 crore and only 25% at the top. The tranche the value band cuts through takes the equity in a plan, so at 60 paise you are buying the keys to the mill at 0.83x to 1.67x the price.

The claim that the value runs out inside. When a family sells a house to pay its debts, the bank with the first mortgage is paid in full, the cousin who lent unsecured gets nothing, and the relative in the middle gets part of what they are owed; that relative is the one whose vote decides the deal. The fulcrum securityThe tranche in a capital structure that is only partly covered by enterprise value, so it is the one that converts into ownership in a restructuring. is the tranche that is partly in the money, and because it is partly impaired it is the one that gets handed the equity. Everything senior to it is paid; everything junior is wiped; it owns the company afterwards.

Fill the stack from the bottom. At Rs 650 crore the senior takes Rs 500 crore, the second lien gets the remaining Rs 150 crore, 50% of its Rs 300 crore, and the unsecured gets nothing; at Rs 850 crore the senior and second lien are paid in full and the unsecured gets Rs 50 crore, 25%. At the Rs 750 crore midpoint the second lien recovers 83%. The senior's recovery is 100% at every point, which is why senior lenders in this position want a quick sale and do not care which plan wins.

The second lien, at 60. At the low end it recovers 50 paise on a 60 paise price, 0.83x, and at the high end 100 paise, 1.67x; more important, a blocking position in the fulcrum means the plan cannot pass without you, so you convert the notes into the equity of a mill you have just valued at up to Rs 850 crore. The unsecured at 15 is a cheaper option on the top of the range, worth 25 paise at Rs 850 crore, but zero across three quarters of the band and with no seat at the table. The senior at par is a loan, not an investment. The answer to where in the capital structure is always the tranche where the value stops, because that is where ownership changes hands.

Then say what could move the fulcrum. If the liquidation value is really Rs 550 crore, the senior becomes the fulcrum and the second lien is wiped; if a strategic buyer will pay Rs 950 crore, the unsecured is in the money and the second lien is just a loan again. The valuation range is the whole analysis, and a candidate who states it as a fact rather than a view has missed the part that pays.