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  1. 012A company's enterprise value is 800. It has 500 of senior debt, 400 of subordinated notes and equity beneath both. In a restructuring, what does each class recover? What changes if enterprise value is 1,000 instead?Leverage and capital structureWarm upKKRNew York · 2025

    Try it first

    At an enterprise value of 800, what do the subordinated notes recover?

    Show the worked solution

    At 800, senior recovers 100%, the notes 75% and equity nothing. Value is paid strictly by priority. Senior takes its 500 first, leaving 300 for the 400 of notes, which is 75%. At 1,000, value covers all 900 of debt, so both classes recover in full and equity is left with 100. The 200 increase in value goes 100 to the notes and 100 to equity.

    In what order does the value get paid out?

    Think of a row of buckets under one tap, each bucket overflowing into the next. The first fills completely before a drop reaches the second. A capital structure works the same way: each class is paid in full before the class below it receives anything. With 800 of value, the senior bucket takes 500 and is full. The remaining 300 flows into the notes bucket, which holds 400, so it is 75% full. Nothing reaches equity.

    Value fills claims in order of priority; the line cuts one trancheEV of 800Senior 500Sub notes 400EquityEV 800EV of 1,000Senior 500Sub notes 400EquityEV 1,000RecoverySenior 500 (100%)Sub 300 (75%)Equity 0Each extra 1 ofEV goes to thenotes until 900Senior 100%, sub 100%, equity 100the notes are the tranche the line cuts
    At an enterprise value of 800 the senior debt of 500 is paid in full, the subordinated notes get the remaining 300 of their 400, a 75% recovery, and equity gets nothing; at 1,000 both debt classes are whole and equity keeps 100.

    Which security does the interviewer care about most?

    The one the value line cuts through. That tranche is the fulcrum securityThe most senior class of claims that is not repaid in full, and so typically ends up owning the restructured company., here the subordinated notes at an EV of 800. Every change in enterprise value between 500 and 900 lands entirely on the notes, so they are the class whose price moves with the valuation argument while senior sits at par and equity sits at zero. In a restructuring the fulcrum holders usually swap their claim for the new equity, which is why distressed investors spend their time on it.

    What changes if enterprise value is 1,000?

    The line clears the debt. Senior is still paid 500, the notes are now paid their full 400, and the 100 left over belongs to equity. The 200 of extra value is split 100 to the notes and 100 to equity, and none of it reaches senior, which was already whole. That asymmetry is the lesson: a senior lender's upside is capped at par, while the junior classes capture the swing. Say the limitations too: real cases add administrative claims ahead of senior debt, and negotiated outcomes sometimes give junior classes a little value to secure their agreement.

    Where candidates lose it

    The usual slip is sharing value pro rata, giving every creditor 800 over 900, about 89%. That ignores priority, which is the whole point of having senior and subordinated claims.

    The second miss is stopping at the recoveries. The follow-up about 1,000 is there to see whether you notice which tranche absorbs the change in value.

    What the interviewer asks next

    • At what enterprise value does equity start to recover anything?
    • If the senior debt were secured on assets worth only 400, how would the answer change?
    • Why might a distressed fund buy the notes at 60 when they recover 75?

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