Recovery Waterfall
Corporate Credit Analysis glossary · Distressed Debt & Restructuring
Definition
The hierarchy by which creditor claims are satisfied from enterprise-value or liquidation proceeds in default: senior secured → senior unsecured → subordinated → equity, with pari passu treatment within each class.
Recovery Waterfall in plain English
When a broke company's assets get sold off, there's usually not enough cash to pay everyone back — so there's a strict pecking order for who gets paid first, called the recovery waterfall. Picture pouring water into a stack of buckets: the top bucket (lenders backed by collateral) fills completely before a single drop spills into the next (plain lenders), then subordinated lenders, and shareholders get only whatever trickles down to the very bottom — often nothing. Within any single level, everyone shares equally and proportionally (that's what 'pari passu' means), so if that level runs short they all take the same percentage hit. Where you sit in this waterfall is the biggest driver of how much you'll actually recover.
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