How do you determine the fulcrum security in a distressed capital structure, and why is it critical for restructuring negotiations?
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The fulcrum security is the class of debt that is expected to receive equity in a restructuring, sitting at the point where enterprise value equals total claims. To find it, build a waterfall analysis: estimate the going-concern value and compare it to the debt stack. The lowest class with a non-zero recovery and the highest class with less than full recovery is the fulcrum. This class holds the power to approve or block a plan, so negotiations must align their incentives—typically offering them equity—to secure a consensual deal.
WHAT INTERVIEWERS LISTEN FOR
- ✓Identify fulcrum as the class that converts to equity
- ✓Perform waterfall analysis with estimated enterprise value
- ✓Explain why fulcrum controls plan approval
COMMON MISTAKES
- ✗Saying it's always the most junior class
- ✗Ignoring the need for valuation estimates
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