Analyzing Distressed Credit Situations

Evaluates distressed debt opportunities by combining capital structure analysis, liquidity runway assessment, recovery waterfall modeling, and restructuring path evaluation to produce actionable investment or advisory recommendations.

When To Use

• Screening a new distressed or stressed credit for potential investment
• Evaluating recovery prospects across tranches in an overleveraged capital structure
• Assessing whether a borrower is heading toward an out-of-court workout, exchange offer, or Chapter 11 filing
• Comparing restructuring outcomes (e.g., amend-and-extend vs. debt-for-equity swap vs. Section 363 sale)
• Updating a thesis when a credit event occurs (missed coupon, covenant breach, ratings downgrade, liquidity draw)

Inputs To Gather

• Capital structure: All funded debt tranches with principal amounts, interest rates (fixed/floating), maturities, call protection, and intercreditor terms
• Financial statements: Trailing 2–3 years of income statement, balance sheet, and cash flow statement; management projections if available
• Credit documents: Credit agreement or indenture excerpts — focus on covenants, subordination, change-of-control provisions, and cross-default triggers
• Market data: Current trading levels for each tranche (price, YTW, spread), CDS levels if available, and comparable distressed transactions
• Operational context: Industry dynamics, competitive position, management track record, pending litigation, regulatory exposure
• Catalyst timeline: Upcoming maturities, debt service payments, covenant test dates, or known negotiation milestones