Recovery waterfall model
Claims by class, priority, recovery, the fulcrum. Distribute a restructured company’s value by absolute priority across a range of enterprise values, identify the fulcrum security in each, and say what every traded class returns at its market price.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: recovery waterfall model.Updated 1 October 2026
Who builds it, and for whatThe first model a restructuring banker, a distressed debt investor or a creditor committee’s adviser builds, and the one every negotiation in a restructuring is conducted around. It answers who gets what at each plausible enterprise value, which class is the fulcrum and so ends up owning the company, and what each traded class returns if bought at today’s price. The arithmetic is settled; the value range is what everyone argues about.
| A | B | C | D | E | F | G | H | |
|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||
| 2 | Blue cells only. $ millions. The company is invented; the order of priority is the ordinary one. | |||||||
| 4 | Value case | Unit | Low | Low-mid | Mid | Mid-high | High | |
| 5 | Enterprise value | |||||||
| 6 | Run-rate EBITDA after the restructuring | $m | 60.0 | |||||
| 7 | EV / EBITDA multiple | x | 4.5x | 5.3x | 6.0x | 6.8x | 7.5x | |
| 8 | Distributable cash on emergence | $m | 5.0 | |||||
| 9 | Share of value that is collateral for the secured debt | % | 90.0% | |||||
| 11 | Market prices (cents on the dollar, as a decimal) | |||||||
| 12 | First lien | % | 88.0% | |||||
| 13 | Second lien notes | % | 35.0% | |||||
| 14 | Senior unsecured notes | % | 12.0% | |||||
| 15 | Subordinated notes | % | 3.0% |
Click any cell. The inspector names the line, the schedule it belongs to and what kind of cell it is; blue on cream is an input, black a calculation, green a value from another sheet. Scroll sideways to see every year.
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Recovery waterfall model: the workbook
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What the base case says
- Enterprise value, middle case
- $360.0m
- Fulcrum security, middle case
- Second lien
- First lien recovery, middle case
- 100.0%
- Second lien recovery, middle case
- 26.4%
- Senior unsecured recovery, middle case
- 12.0%
- Second lien return at its market price
- -24.6%
Read from the workbook as served, every input at its default. Periods: Low, Low-mid, Mid, Mid-high, High. The figures are invented and move with whatever you type in.
What this model is
What each creditor recovers when a company is restructured, at five enterprise values, distributed by absolute priority: new money and administrative claims first, secured lenders from their collateral in lien order, unsecured claims pro rata, subordinated notes behind the senior notes, and the old equity last.
Each column is a value case, not a year. The fulcrum security, the most senior class not paid in full, is named in every case; it is the class that will end up owning the reorganised company, and the one a distressed investor buys.
The DIP facility is new money sized from the shortfall a 13-week cash flow forecast reports. Change it, or the collateral share, and watch the fulcrum move.
Seats: Investment banking, Equity research and hedge funds, Private equity.
Careers that do this work: investment banking, debt capital markets, restructuring, private credit, distressed & special situations, private equity.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Claims by class
The claims register a recovery is built on
Claims, rows 5–6 · Claims, rows 9–15 · Claims, rows 18–22
Absolute priority distribution
Value paid out by seniority, collateral first
Assumptions, rows 6–9 · Waterfall, rows 6–12 · Waterfall, rows 15–19 · Waterfall, rows 22–29 · Waterfall, rows 32–37
Fulcrum analysis and implied returns
Which class is the fulcrum, and what it returns
Assumptions, rows 12–15 · Returns, rows 6–11 · Returns, row 14 · Returns, rows 17–20 · Returns, rows 23–24 · Summary, rows 5–12 · Summary, rows 15–16
What you should be able to explain
- The order of priority: new money and administrative claims, secured classes from collateral in lien order, unsecured claims pro rata, subordinated debt, equity.
- Why an undersecured lender also appears in the unsecured pool, as a deficiency claim.
- What contractual subordination does in a distribution, and why trade creditors do not benefit from it.
- How to find the fulcrum security, and why it is the class that ends up owning the reorganised company.
- How a market price turns a recovery into an implied return, and which value case the price is betting on.
What a reviewer looks for
- Secured lenders paid from total value rather than from their collateral.
- Deficiency claims forgotten, so the unsecured pool is shared among too few claims.
- Subordinated notes paid pro rata with the senior notes they are subordinated to.
- Accrued interest after the filing date added to an undersecured claim.
- A single enterprise value, when the point of the exercise is the range.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Claims are principal plus interest accrued to the filing date. Interest after filing is not claimed, the ordinary treatment for an undersecured creditor.
- Secured classes recover from collateral only, in lien order; any shortfall is an unsecured deficiency claim that shares in the unsecured pool alongside the notes and trade claims.
- The share of value that is collateral is a single input. In practice it is argued asset by asset (unpledged subsidiaries, intellectual property, cash outside the lenders’ control); here it is one number so its effect is visible.
- Subordination is contractual and is applied as a turnover: the subordinated class’s pro rata share goes to the senior notes until they are paid in full. General unsecured creditors are not beneficiaries of the subordination.
- Market prices are cents on the dollar, entered as decimals. The implied return is recovery over price, less one, before the time it takes to emerge.
Build it yourself
The starter workbook
The Waterfall sheet has been cleared: the value to distribute, the secured classes from collateral and their deficiency claims, the unsecured pool shared pro rata, the subordination turnover and the residual to equity. Build it so that the Returns sheet names the fulcrum in each value case, and the Checks sheet confirms every dollar is distributed once.
Blanks: Absolute priority distribution. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Build · Lab · ~15 min
Capital Stack Challenge
Finance a real buyout from revolver to equity, hold it through a shock, and explain every layer against the deal the sponsor actually did.
Read · Guide · 8 min
Restructuring Interview Questions: Fulcrum, Waterfall & Beyond
Read · Guide · 11 min
Credit and Covenant Modelling: What a Lender Actually Tests
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Vocabulary: Recovery Waterfall, Absolute Priority Rule, Fulcrum Security, Debtor-in-Possession (DIP) Financing, Deficiency Claim, Contractual Subordination, Pari Passu, Second Lien, Cents on the Dollar, Distressed Debt.
Questions about this model
What is the fulcrum security?
The most senior class that is not paid in full at the enterprise value being considered. Every class above it is covered; every class below it receives little or nothing. Because its recovery depends on the value of the reorganised business, it usually receives that business’s equity, which is why distressed investors buy it.
Why do secured lenders appear twice?
A secured lender recovers from its collateral first. If the collateral is worth less than the claim, the shortfall is a deficiency claim, which is unsecured and shares pro rata with the notes and trade creditors in whatever unencumbered value is left. The model carries both pieces and adds them for the class’s total recovery.
How is the DIP facility sized?
From the liquidity the company needs to get through the process: the peak shortfall in a 13-week cash flow forecast plus a cushion. It is new money with super-priority, so it is paid before everyone else, and every dollar of it comes out of what the existing creditors recover.
What does subordination change?
The subordinated notes’ pro rata share of the unsecured pool is turned over to the senior notes until they are paid in full. General unsecured creditors are not party to that agreement and receive no benefit, so the senior notes recover more than trade claims of the same rank.
What does it cost?
Nothing to inspect: the whole workbook is on this page. A free account chooses one worked model to keep, and downloads every starter workbook. L3VLUP Pro ($25/month) downloads the whole library and opens every model’s formulas in the inspector.