Distressed LBO and Debt-for-Equity Swap

Step 1: Distressed Enterprise Value

Distressed Enterprise Value = LTM EBITDA × Distressed Trading Multiple

Using current LTM EBITDA of $60.0m and the 6.0x distressed trading multiple:

Distressed Enterprise Value = $60.0m × 6.0x = $360.0m

This single number is the anchor of the entire restructuring, because it defines how much value there is to fight over. Note how far it has fallen from the $880.0m paid at entry: EBITDA is down 45.5% and the multiple has compressed from 8.0x to 6.0x, and the two effects compound. The critical judgement call is the multiple itself — a stressed business does not trade at the multiple its healthy peers command, so using a going-concern comp set here would systematically overstate recoveries and hand negotiating leverage to the junior creditors.

Step 2: Distributable Value

Distributable Value = Distressed Enterprise Value − Restructuring and Advisory Costs

Using the $360.0m enterprise value and $15.0m of restructuring and advisory costs:

Distributable Value = $360.0m − $15.0m = $345.0m

Restructuring and advisory costs — lawyers, financial advisers, the independent business review, court fees — are administrative claims that rank ahead of every pre-petition creditor, so they come out of the pot before anyone else is paid. At $15.0m they consume 4.2% of enterprise value, and in a contested process rather than a pre-pack that figure can easily double. This is one of the main economic arguments creditors use in favour of a consensual pre-packaged deal.

Step 3: Recovery Waterfall by Tranche

Recovery = MIN(Value Remaining, Claim), applied in strict order of priority, with Recovery % = Recovery / Claim.

Starting from $345.0m of distributable value and working down the structure:

Total debt claims are $30.0m + $280.0m + $150.0m + $80.0m = $540.0m, so the blended recovery across the debt stack is $345.0m / $540.0m = 63.9%.

A recovery waterfall is simply the absolute priority rule expressed in numbers: each tranche is paid in full before the next one receives anything, and the tranche where the money runs out absorbs the entire remaining loss. The result here is starkly binary — two tranches are money-good at par, one is impaired, and everything below it is wiped out. That binary quality is exactly why creditors litigate over valuation rather than over legal priority: a one-turn change in the exit multiple moves $60.0m of value across the line and can flip who controls the business.

Step 4: Fulcrum Security and the Debt-for-Equity Swap

The fulcrum security is the most senior tranche that is not repaid in full — the tranche at which value "breaks." Here that is the senior unsecured notes, which receive $35.0m against a $150.0m claim.

Reinstated Debt = Super-senior revolver + Senior secured term loan B

Reinstated Debt = $30.0m + $280.0m = $310.0m

New Equity Value = Distributable Value − Reinstated Debt

New Equity Value = $345.0m − $310.0m = $35.0m

Allocating that equity under the agreed pre-pack terms — 95% (0.95) to the converting unsecured noteholders and a 5% (0.05) consent stake to the sponsor and management:

A debt-for-equity swap converts an unpayable claim into ownership: the unsecured noteholders give up $150.0m of face value and interest entitlement and receive 95% of the reorganised company instead, which makes them the new controlling shareholders. Note the small but deliberate gap between the strict-priority answer of 23.3% and the 22.2% they actually receive — that 1.1 percentage points is the price of consent, paid to the wiped-out sponsor so the deal can be documented as a consensual pre-packaged restructuring rather than fought out in a contested Chapter 11, German StaRUG or UK scheme process. Creditors accept that leakage because a contested case burns fees, management attention and customer confidence far in excess of $1.8m.

Total face value of debt removed = $150.0m converted + $80.0m cancelled = $230.0m.

Step 5: Post-Restructuring Leverage and Sponsor Outcome

Leverage = Total Debt / LTM EBITDA

Using pre-restructuring debt of $540.0m and post-restructuring debt of $310.0m against unchanged LTM EBITDA of $60.0m:

Leverage (pre) = $540.0m / $60.0m = 9.0x

Leverage (post) = $310.0m / $60.0m = 5.2x

Sponsor MoM = Value Received / Capital Invested

Sponsor MoM = $1.8m / $220.0m = 0.01x

Leverage is the whole point of the exercise: at 9.0x the company cannot service its interest bill or refinance, while at 5.2x it has a capital structure a lender would underwrite and a cash flow profile that can fund maintenance capital expenditure again. The sponsor's 0.01x money-on-money is effectively a total loss of the $220.0m equity cheque, which is the honest answer to "who gets what" — in a distressed LBO the equity is not diluted, it is extinguished, and the consent stake is a negotiating courtesy rather than a return.

Final Results

• Distressed enterprise value: $360.0m
• Distributable value to claimholders: $345.0m
• Fulcrum security: senior unsecured notes, recovering 22.2% in new equity
• Blended recovery across the debt stack: 63.9%
• Face value of debt removed: $230.0m, cutting leverage from 9.0x to 5.2x
• Sponsor outcome: 0.01x MoM on a $220.0m equity investment

This recovery analysis is the document that drives the negotiation: it tells the senior lenders they are money-good and should push for a quick reinstatement, tells the unsecured noteholders they are the fulcrum and should therefore be running the process and choosing the new board, and tells the sponsor that its only remaining currency is speed and consent. The same framework is what a distressed debt fund runs before buying into the capital structure — you buy the fulcrum tranche at a discount precisely because it converts into the equity.

Would you like to explore how the answer changes if the two lender groups cannot agree on the distressed multiple — for example, whether an 8.0x mark would move the fulcrum down into the subordinated PIK notes and hand control to a different creditor group?