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Valuation in Distressed Situations Flashcards

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  1. What is a 'recovery rate' in distressed debt analysis?

    Answer: The percentage of face value a creditor ultimately recovers on a defaulted claim

    The recovery rate measures how many cents on the dollar a creditor recovers from a distressed investment after the restructuring or liquidation process concludes.

  2. What is 'distressed debt investing'?

    Answer: Buying the debt of financially troubled companies at a discount with the goal of profiting from recovery

    Distressed debt investors purchase bonds or loans of troubled companies at steep discounts, aiming to profit either from operational recovery, a restructuring that yields above-purchase-price recovery, or conversion to equity.

  3. What is a 'fulcrum security' in a distressed capital structure?

    Answer: The debt or security class at which value breaks — below which claims receive less than par

    The fulcrum security is the tranche in the capital structure at which enterprise value is exhausted, meaning holders above receive full recovery while holders below receive partial or no recovery.

  4. What does 'par' mean in the context of distressed debt trading?

    Answer: The face value of the debt instrument at 100 cents on the dollar

    Par refers to 100 cents on the dollar — the face value of a debt instrument; distressed debt trades below par (at a discount), while performing debt trades at or above par.

  5. What is the 'loan-to-value' (LTV) ratio used to assess in distressed situations?

    Answer: How much debt a company carries relative to the value of the assets or business securing it

    LTV compares the outstanding debt to the collateral or enterprise value securing it, indicating how well-covered the lender is and how much equity cushion (if any) exists.

  6. What is a 'sensitivity analysis' in the context of restructuring valuation?

    Answer: Testing how changes in key assumptions affect enterprise value and creditor recoveries

    Sensitivity analysis shows how enterprise value and creditor recovery rates change when key assumptions — revenue growth, EBITDA margins, exit multiples — are varied, revealing the range of outcomes.

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