Recovery waterfalls in practice
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
7 min read · updated October 7, 2026
Restructuring basics showed the idea: value pours down the capital structure in order of seniority, and the layer where it runs out is the fulcrum. Real waterfalls, and interview versions of them, add four complications. You have to know what value is being shared, what comes off the top before any lender is paid, how big each claim really is, and what happens when a secured lender's collateral is not worth enough. Get those right and the rest is arithmetic.
Step 1: what value is being shared
The starting number is distributable value: usually the enterprise value of the reorganized company, the value it is agreed to be worth as a going concern, plus any cash it does not need to run the business. In a sale it is the sale proceeds. This is the whole pie. Everything below is about slicing it.
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Frequently asked
- How do you run a recovery waterfall?
- Start with distributable value, usually enterprise value plus excess cash. Take the DIP loan and administrative claims off the top. Build each claim at its full amount, including accrued interest and any PIK interest that has been added to the balance. Pay secured claims up to the value of their collateral, add any shortfall to the unsecured pool as a deficiency claim, and share the unsecured value pro rata. The class where the value runs out is the fulcrum.
- How does PIK interest change a recovery?
- PIK interest is added to the balance instead of being paid in cash, so the claim grows every year. A $300M note issued two years ago at a 10% PIK rate is a $363M claim, not $300M. If $210M reaches it, it recovers about 58%, not the 70% you get by forgetting the PIK.
- What is a deficiency claim?
- The part of a secured loan its collateral cannot cover. If a $300M first lien is secured by collateral worth $250M, it takes the $250M from its collateral and the $50M shortfall becomes an unsecured claim that shares with the other unsecured creditors.
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