Recovery analysis estimates what remains for a particular claim after the operating case fails. It needs both a value assumption and a priority assumption. Enterprise value alone does not tell you what your instrument receives.
Work through the waterfall
Assume fictional distressed enterprise value of $70 million, realization costs of $5 million and a $10 million priority claim that is paid before a $60 million term loan. The case stipulates that all remaining value is available to the term loan; real collateral and guarantee arrangements can be more complex.
Value available to the term loan is $70 million − $5 million − $10 million = $55 million. Principal recovery is $55 million / $60 million = 91.7%. A junior claim receives nothing under these simplified assumptions.
| Enterprise value | Available after costs and priority claim | Term-loan principal recovery |
|---|---|---|
| $55m | $40m | 66.7% |
| $70m | $55m | 91.7% |
| $85m | $70m | 100%, capped at principal |
Do not show 116.7% principal recovery in the final row. Any value above the claim passes to other entitled parties under the assumed structure. Accrued interest and fees require a separate claim definition.
Challenge value and perimeter
A healthy-business multiple may be inappropriate for a distressed scenario. Lower earnings, weaker customer retention, forced-sale timing and process costs can affect value. If using an EBITDA multiple, distinguish the stressed earnings base from the assumed multiple and show both sensitivities.
Then ask which assets and entities support the claim. Structural subordination, restricted subsidiaries, guarantees and collateral releases can change the allocation. “First lien” is not a universal promise of full recovery.
Avoid counting cash twice
If cash is included in the recovery, confirm that it remains available after operating needs and process costs. Do not add an opening cash balance that your downside model already consumes. Distinguish enterprise value from equity value and reconcile the cash/debt convention.
Explain the decision implication
A recovery estimate should help judge the loss severity under stated assumptions. It is not a forecast certainty. Present the value range, the most important priority assumption and what evidence you need to reduce uncertainty.
Use the underwriting test guide for the full case workflow. The Private Credit Underwriting Workbook adds recovery exercises to cash, debt and covenant cases, with complete answers and a printable memo worksheet.