Seventy-five cents, if it arrives as 30 cents of cash and 50 of face in takeback
notes trading at 90. And whether that is a good outcome depends entirely on a date that nobody
in the process has any obligation to hit.
Recovery screens are quoted as a single number. The number is a percentage of face, it comes
out of a waterfall, and it is the figure that ends up on the committee page. It also omits two
things that routinely matter more than the estimate itself: what the recovery is paid
in, and when.
Composition: an 80-cent recovery that is worth 75
Plans of reorganisation rarely pay creditors in cash. A typical settlement for an impaired class
mixes cash, new debt in the reorganised company, and equity. The waterfall values all three at
face. The market does not.
Take a class recovering 80 cents on the dollar, paid as follows.
Form of recovery
Face
Value
Worth
Cash at emergence
30c
100
30.0c
Takeback notes in the reorganised company
50c
90
45.0c
Total
80c
75.0c
The takeback notes are new paper issued by a company that has just been through a
restructuring. Trading at 90 is an ordinary outcome, not a pessimistic one.
Five cents of the headline has disappeared, and it disappeared for a reason that has nothing to
do with whether the recovery analysis was any good. The waterfall was right. The instrument mix
was the variable.
The mistake worth naming: a recovery estimate and a recovery
valuation are not the same output. The first is arithmetic on claims. The second requires
a view on what the paper you are handed will trade at — which is a second, independent
credit judgement on the post-emergence company.
Time: the same 75 cents at four different returns
Now suppose the position was bought at 50 cents. The recovery is worth 75. The return depends on
how long the process runs, and restructuring timetables are set by courts, creditors' committees
and negotiation, not by the investor's holding period.
Time to emergence
Money multiple
Annualised return
1 year
1.50x
50.0%
2 years
1.50x
22.5%
3 years
1.50x
14.5%
5 years
1.50x
8.4%
Same purchase price, same recovery, same instrument. Only the duration changes.
The money multiple is identical in every row. At two years this is a distressed return. At five
years it is worse than the yield available on performing credit at the time of purchase, for a
position that carried litigation risk, valuation risk and no coupon.
There is no version of the analysis that fixes this by being more careful about the waterfall.
Duration is an input on its own, and it deserves its own sensitivity.
The frictions that come out before anything reaches you
A third layer sits between enterprise value and recovery: the claims that are paid before the
pre-petition capital structure sees anything at all.
Step
Amount
Enterprise value
$700M
Less professional fees and administrative claims
($40M)
Less DIP facility (superpriority)
($100M)
Available to pre-petition claims
$560M
Twenty percent of the enterprise value never reaches the capital structure being analysed. On
the worked example this is enough to move the fulcrum out of the senior unsecured notes and into
the second lien — which, as the underlying chapter puts it, is the difference between owning
the security you wanted and owning a zero.
What a recovery estimate should carry with it
The mix. Cash, new debt, equity — and a stated value for each of the
non-cash components, with the reasoning.
The duration, as a range. Not a point estimate. Two years and five years
produce the same multiple and different investments.
The frictions, explicitly. Fees and new money are the first claims on value
and the easiest to omit, because neither appears in the pre-petition capital structure you
are looking at.
The break-even recovery. Not what you expect to get, but what you need in
order not to lose money, and how much cushion sits between the two.
A position that clears at the expected recovery and fails at the break-even is a position whose
margin of safety is the accuracy of a valuation. That is worth knowing before it is sized, not
after.
The workbooks behind this article
Every figure above is a live formula in the companion files for
The Distressed Debt Investor. Change one input and the rest of the sheet answers.
They are free, and they need no account and no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.