A company has a $200 million senior secured term loan and $150 million of unsecured bonds. In Chapter 11, the enterprise value is determined to be $250 million. Calculate recoveries for each class under an absolute priority rule waterfall. Then identify which security is the fulcrum and explain its significance.

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Senior secured claim $200M gets paid first from $250M, leaving $50M. Unsecured claims $150M receive the remaining $50M, recovering 33.3 cents on the dollar. Equity recovers nothing. The senior secured loan recovers 100% ($200M). The fulcrum security is the unsecured bonds because they are the most junior class that receives a partial recovery.

The fulcrum security is typically entitled to the equity of the reorganized entity because the value “breaks” in that class; it drives the restructuring negotiations as the residual claimant.

Follow-up pressure:

If the enterprise value were $180M, what is the recovery for the unsecured bonds and which class becomes fulcrum?
How would a priming $75 million DIP facility approved in the bankruptcy change the calculus?
Explain what a “cramdown” means in this context and how the fulcrum class might be affected.

Cash	150
Accounts receivable	120
Inventory	90
Total current assets	360
PP&E, net	400
Goodwill	150
Other assets	40
Total assets	950

Accounts payable	80
Deferred revenue	40
Total current liabilities	120
Long-term debt	380
Total liabilities	500
Total equity	450
Total liabilities & equity	950

Secured vs Unsecured Recovery, Explained

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