Distressed Credit Case Study

Reviewed by Fallon Han· Updated 2026-05-22 18:50:08.416

This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.

I'm a first-year MBA student in the U.S. on F-1 status, and I want to practice for distressed debt funds. Please test me on a stressed credit case and give me a detailed assessment after. I want you to push on capital structure, recovery analysis, and downside scenarios.

Absolutely. I will run this like a real credit workout interview. Case: A manufacturing company has become stressed after a demand slowdown and a failed expansion. Capital structure: - $500 million first lien term loan due in 4 years - $150 million second lien notes due in 5 years - $200 million unsecured notes due in 6 years - $100 million revolver, $60 million drawn - Cash on hand: $30 million Business: - Last year EBITDA was $80 million - This year EBITDA is expected to drop to $45 million - Maintenance capex is $20 million - Working capital is expected to absorb $15 million of cash - Management says there is still some asset value in the plants and equipment, but the business is losing customers Your first task: walk me through the capital structure in priority order and tell me which creditor class is most likely to recover first if the company goes through a restructuring.

First, the revolver gets paid before the term loan because it is usually senior secured and can be collateralized. Then the first lien term loan would follow because it has the same collateral pool but lower priority than the revolver. After that, second lien notes would recover if there is enough collateral value left. The unsecured notes would be last and likely take the biggest haircut or be wiped out if enterprise value falls below total debt.

Good start. You correctly identified the general waterfall, but I want more precision. Assessment so far: - Strength: You know the broad order of recovery. - Gap: You did not mention that the revolver is usually not just senior, but also often protected by a borrowing base and may have superpriority in a restructuring if undrawn availability is tight. - Gap: You should explicitly say that the first lien term loan and revolver typically share the same collateral, but intercreditor terms matter. - Gap: You should tie recovery to collateral coverage and enterprise value, not only claim priority. Next question: estimate a rough enterprise value in the stress case using a 6.0x to 7.0x EBITDA multiple on the reduced EBITDA. Then tell me whether the second lien and unsecured notes are likely in or out of the money.

Using the stressed EBITDA of $45 million, a 6.0x to 7.0x multiple gives enterprise value of about $270 million to $315 million. That's below the first lien debt of $500 million, and far below total debt of $850 million plus revolver drawn amount. So the second lien and unsecured notes are clearly out of the money. Even the first lien would likely face a significant loss, unless collateral value from assets is materially higher than the going-concern value.

Better. That is the right framework. Assessment: - You used the right range and applied it to stressed EBITDA correctly. - You noticed that the first lien alone exceeds the implied EV, which is exactly the kind of issue a distressed investor should flag. - Strong point: you did not assume all debt is recovered from enterprise value alone. Refinement: - Since the company has plants and equipment, I would expect you to mention liquidation value as a downside floor. - For a workout interview, I would want you to compare going-concern value against liquidation value and explain which is more relevant for each creditor class. Now assume liquidation value is only $220 million after fees, with recovery costs of 10 percent. How would you think about recoveries for each layer, and which class has the best chance of getting meaningful value?

If liquidation value is $220 million before fees and there are 10 percent costs, net recovery would be about $198 million. That would likely be consumed by the revolver and part of the first lien. The revolver and first lien have the best chance of meaningful recovery because they are secured by collateral, while the second lien might recover only if there is excess collateral after the first lien, which seems unlikely here. The unsecured notes would probably get nothing in liquidation.

Solid answer. You are thinking like a distressed credit analyst. Detailed feedback: - Correct: net liquidation value after fees is about $198 million. - Correct: that amount is far below the first lien claim, so second lien and unsecured are likely wiped out in liquidation. - Good: you recognized the importance of secured collateral in downside scenarios. What I would push harder on in an interview: - The revolver is drawn $60 million, so it would likely be protected first. - You should quantify the first lien recovery more carefully: if the revolver is satisfied first, the remainder for the first lien is only about $138 million, implying a very low recovery on a $500 million claim. - You should note that in a restructuring, first lien lenders may prefer to equitize debt rather than force liquidation if going-concern value is higher. Final question: management proposes a restructuring where first lien lenders get 85 percent of the new equity, second lien gets 10 percent, and unsecured gets 5 percent warrants. Do you think that is realistic based on the numbers? Give me your view and your final recommendation as an investor.

Based on the numbers, that proposal seems too generous to the junior classes. The company likely cannot support meaningful value for second lien or unsecured notes because both going-concern value and liquidation value are below the senior claims. I would expect first lien lenders to capture most or all of the reorganized equity, with second lien only receiving something if there is a strong argument for higher enterprise value or if they are needed to support a deal. Unsecureds probably would not get much, if anything. As an investor, I would be cautious on the second lien and avoid the unsecureds, while first lien might be interesting if I believed collateral and recovery were still underrated.

Final assessment: Overall performance: 7.5 out of 10 What you did well: - You understood the basic capital structure waterfall. - You applied stressed EBITDA to a valuation range correctly. - You recognized the difference between going-concern value and liquidation value. - You identified that junior classes are likely out of the money. What held you back: - Your recovery analysis was directionally right but not fully quantified. - You needed more precision on revolver treatment, intercreditor priority, and first lien recovery. - You could have been more decisive about the proposed restructuring terms being unrealistic for junior creditors. How to improve for distressed debt interviews: - Always start with claim priority and collateral coverage. - Build a simple EV range from stressed EBITDA. - Then run a liquidation floor and compare both outcomes. - Finish with a clear investment view: buy, avoid, or need more diligence. If you want, I can run a harder second round with covenants, liquidity burn, and a springing maturity trap.