Fulcrum Security
Corporate Credit Analysis glossary · Distressed Debt & Restructuring
Definition
The class of debt in a defaulted issuer's capital structure whose claims sit at the boundary between full and partial recovery, and which therefore receives equity in a restructuring; the focal point of distressed-debt investing.
Fulcrum Security in plain English
When a company goes bankrupt there usually isn't enough money to pay everyone back, and lenders get repaid in a strict order, safest loans first and riskier ones last. The fulcrum security is the loan sitting right on the cutoff line: lenders above it get fully repaid, lenders below it get little or nothing, and this middle group typically gets handed ownership (equity) in the reorganized company instead of cash. Picture pouring a fixed amount of water down a row of buckets, one bucket only partly fills, and that half-full one is the fulcrum. Distressed-debt investors hunt for exactly this security because owning it means owning the new company that emerges from bankruptcy.
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Practice Fulcrum Security
If the liquidation value of the assets is $350M, which group is the fulcrum security?
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