Absolute priority distribution
Value paid out by seniority, collateral first.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: absolute priority distribution.Updated 1 October 2026
Part of credit and restructuring models, with the models, labs and guides around it.
What it does
The mechanic at the heart of every recovery analysis. Distributable value pays new money and administrative claims first. Secured classes recover from their collateral in lien order, and any shortfall becomes an unsecured deficiency claim. Unencumbered value plus any collateral surplus forms the unsecured pool, shared pro rata by every unsecured claim; a contractually subordinated class’s share is turned over to the senior notes until they are whole; the residual belongs to equity. The same mechanic gives loss given default in a credit model.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 54–56: Distressed EBITDA, % of FY0, Distressed EV / EBITDA, Administrative and priority claims, % of distressed EV
- Recovery, rows 5–8: Distressed EBITDA, Distressed enterprise value, Administrative and priority claims, paid first, Value left for the lenders
- Recovery, rows 11–17: Secured claims: revolver fully drawn, term loans at close, Recovered by the secured lenders, Secured recovery, Senior unsecured notes…
- Assumptions, rows 6–9: Run-rate EBITDA after the restructuring, EV / EBITDA multiple, Distributable cash on emergence, Share of value that is collateral for the secured debt
- Waterfall, rows 6–12: Enterprise value: EBITDA x multiple, Distributable value: EV plus cash, DIP facility, Administrative and priority claims…
- Waterfall, rows 15–19: First lien, from collateral, First lien deficiency claim (unsecured), Second lien, from what collateral remains, Second lien deficiency claim (unsecured)…
- Waterfall, rows 22–29: Unsecured pool: unencumbered value plus collateral surplus, Unsecured claims, deficiency claims included, Pro rata recovery on unsecured claims, First lien deficiency, share of the pool…
- Waterfall, rows 32–37: Turned over from the subordinated to the senior notes, Senior notes, after turnover, Subordinated notes, after turnover, Residual to the old equity…
What a reviewer looks for
- Secured classes paid from total value instead of collateral.
- Deficiency claims left out of the pool.
- Subordination applied against creditors who are not party to it.
Learn it, then build it
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
Vocabulary: Absolute Priority Rule, Deficiency Claim, Pari Passu, Contractual Subordination, Recovery Waterfall.