A first-lien label describes an important part of a lender's position, but it is not a dollar recovery forecast. Recovery depends on available value, the assets and entities supporting the claim, competing rights, costs and timing. A simple interview waterfall should make its assumptions explicit.
A principal-only example
Assume a fictional borrower has distressed enterprise value of $70 million. The case specifies $5 million of realization costs and a $10 million priority claim ahead of a $60 million term loan. All remaining value is assumed available to that term loan.
The lender receives $55 million, implying 91.7% principal recovery. If enterprise value falls to $55 million, available value falls to $40 million and recovery to 66.7%. The label of the term loan has not changed; the available value has.
| Input | Base recovery case |
|---|---|
| Enterprise value | $70m |
| Costs | $5m |
| Prior claim | $10m |
| Value for term loan | $55m |
| Term-loan principal | $60m |
This is a stipulated educational waterfall. It is not an opinion about the priority of any actual agreement or insolvency process.
Check the perimeter
Ask which subsidiaries guarantee the loan, which assets are pledged and which claims sit at entities closer to the operating assets. Collateral exclusions, structural subordination and intercreditor terms can matter. Appropriate legal analysis is necessary in a live transaction.
Do not assume every asset in consolidated financial statements is available to every lender. Equally, do not infer priority solely from an instrument's marketing label.
Challenge the valuation
If distressed value is calculated from EBITDA, inspect both the earnings base and the multiple. Customer losses, margin pressure and process conditions may affect both. Using a healthy-business multiple on a mildly stressed earnings number can produce a reassuring result without representing a meaningful downside.
The multiples in a practice case should be labeled as assumptions unless supported by current, relevant market evidence. A recovery sensitivity is useful precisely because value is uncertain.
Reconcile cash and claims
Cash may already be consumed in the operating downside or reserved for necessary expenses. Do not add it to recovery again without reconciling the schedule. State whether claims include principal only or also accrued interest and fees. Cap principal recovery at the principal claim when using a principal-only model.
The recovery analysis guide shows a fuller waterfall and sensitivity. The Private Credit Underwriting Workbook connects recovery with debt service and maturity risk. Start at the private-credit desk if you are preparing the entire case discussion.
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