skills/distressed-recovery-waterfall/references/workflow.md

# Workflow

## Table Of Contents

- 1. Frame the mandate
- 2. Build legal-entity and obligor map
- 3. Build claims register
- 4. Normalize the debt stack
- 5. Analyze collateral and priority
- 6. Establish valuation cases
- 7. Construct waterfalls
- 8. Identify fulcrum security
- 9. Compare restructuring alternatives
- 10. Analyze plan feasibility and voting
- 11. Build stakeholder leverage map
- 12. Pressure-test
- 13. Recommend next steps
- Adaptive outputs

## 1. Frame the mandate

Identify the client posture and decision:

- Debtor, board, sponsor, first-lien lender, second-lien lender, unsecured noteholder, trade creditor, DIP lender, buyer, stalking horse, credit bidder, or internal banking team.
- Quick read, full model, memo, board deck, creditor presentation, valuation dispute, restructuring alternatives analysis, or diligence agenda.
- Pre-default, defaulted, forbearance, pre-filing, in-court, RSA signed, sale process, or liquidation.
- Jurisdiction and forum. Do not assume U.S. Chapter 11 if the situation is cross-border or non-U.S.

State the assumed perspective in the output.

## 2. Build legal-entity and obligor map

Map value and claims to entities before modeling recoveries:

- Parent, HoldCo, OpCo, borrowers, issuers, guarantors, non-guarantor subsidiaries, restricted subsidiaries, unrestricted subsidiaries, foreign subsidiaries.
- Asset ownership, cash location, collateral grants, guarantees, pledge limitations, and intercompany claims.
- Structural subordination, trapped cash, foreign-law limitations, and value leakage.

Output table:

| Entity | Role | Assets | Debt/claims | Guarantees | Collateral provided | Key issues |
|---|---|---:|---:|---|---|---|

If entity detail is missing, flag it as a major diligence gap.

## 3. Build claims register

Capture all claims, not just funded debt:

- DIP, adequate protection, admin claims, professional fees, priority tax, wage, employee, pension, retiree, environmental, critical vendor, trade, lease rejection, litigation, customer deposits, warranty, derivative, letters of credit, surety, guarantees, intercompany, preferred equity, warrants, options, and common equity.
- For each claim, record allowed, estimated, disputed, contingent, unliquidated, or subject to objection.
- Show recoveries including and excluding material disputed claims if they change the value break.

## 4. Normalize the debt stack

Order by true economic priority:

1. Superpriority and DIP.
2. Administrative and statutory priority claims.
3. First-out ABL or revolver.
4. First-lien term loans or notes.
5. Pari passu first-lien instruments.
6. Second-lien debt.
7. Senior unsecured notes and deficiency claims.
8. General unsecured claims.
9. Subordinated debt.
10. Preferred equity.
11. Common equity.

Adjust this ordering for collateral pools, guarantee limitations, structural subordination, first-out/last-out unitranche, pari-plus structures, double-dip claims, priming debt, and local-law priorities.

## 5. Analyze collateral and priority

For each secured instrument:

- Identify collateral pool.
- Determine lien priority.
- Identify guarantor coverage.
- Separate collateral value from enterprise value.
- Identify whether the claim may be undersecured.
- Flag lien perfection, enforceability, intercreditor, turnover, standstill, release, and enforcement-control issues.

Never assume a claim is fully secured only because it is called secured.

## 6. Establish valuation cases

Build value using multiple approaches when possible:

- Reorganization value from normalized EBITDA, cash flow, DCF, comps, precedent transactions, SOTP, market-implied value, plan value, and exit-financing capacity.
- Sale value from whole-company sale, division sale, asset sale, 363 sale, or credit bid.
- Liquidation value from asset-specific recoveries less wind-down costs and priority claims.
- New-money-adjusted value after DIP, exit facility, rights offering, backstop premium, warrants, and MIP.

Use at least low/base/high cases. Explain what variable moves the value break.

## 7. Construct waterfalls

Build separate views as needed:

- Legal-entitlement waterfall.
- Plan or negotiated waterfall.
- Collateral-pool waterfall.
- Liquidation waterfall.
- Sale proceeds waterfall.
- LME-adjusted before/after waterfall.
- New-money and ownership waterfall.

For each class, calculate:

- Claim amount.
- Cash recovery.
- New debt recovery.
- Equity recovery.
- Warrants or contingent value.
- Rights participation value if relevant.
- Total recovery value.
- Recovery percentage.
- Ownership percentage before and after MIP, warrants, and backstop economics.
- Implied upside/downside to trading price.

## 8. Identify fulcrum security

For each scenario, identify:

- Value-break class.
- Fulcrum class.
- Classes money-good.
- Classes impaired but in the money.
- Classes out of the money.
- Practical control constituency.
- Whether the fulcrum shifts under downside or upside cases.
- Whether a legal, voting, or liquidity constituency has more practical leverage than the mathematical fulcrum.

Language to emulate:

"Base-case value breaks in the second-lien notes, but the conclusion is not robust. A 0.5x multiple decline moves the break into first lien, so first lien cannot be treated as passive even though it is covered in the base case."

## 9. Compare restructuring alternatives

For each alternative, show economics, feasibility, support needed, timing, risks, and recommendation:

- Amend-and-extend.
- Forbearance.
- Out-of-court exchange.
- LME, including uptier, dropdown, double-dip, or non-pro-rata exchange.
- Equitization.
- New-money rescue financing.
- Prepackaged Chapter 11.
- Pre-arranged Chapter 11.
- Freefall Chapter 11.
- 363 sale or credit bid.
- Liquidation.
- Receivership, foreclosure, Article 9 sale, scheme, administration, CCAA, or other non-U.S. processes where relevant.

## 10. Analyze plan feasibility and voting

If an in-court plan is relevant, map:

- Class structure.
- Impaired versus unimpaired classes.
- Expected vote.
- Blocking positions.
- Known ad hoc groups.
- Insider holdings.
- Cramdown path.
- Absolute-priority issues.
- Fair-and-equitable issues.
- Best-interests test and liquidation floor.
- Whether at least one impaired accepting class exists.

Do not declare a plan confirmable. State business implications and flag legal points for counsel.

## 11. Build stakeholder leverage map

For each stakeholder, identify:

- Economic recovery.
- Legal rights.
- Voting power.
- Litigation threat.
- New-money ability.
- Operational importance.
- Process leverage.
- Likely negotiation ask.
- What concession may bring them into support.

## 12. Pressure-test

Challenge:

- Normalized EBITDA.
- Exit multiple.
- Management case credibility.
- Liquidity runway.
- DIP size.
- Professional fees.
- Disputed claims.
- Liquidation discounts.
- Make-whole and default interest.
- New-money dilution.
- Exit financing availability.
- Market price reconciliation.

## 13. Recommend next steps

End with practical banker guidance:

- Who to engage first.
- What transaction path to pursue.
- Which alternatives to keep as backup.
- What diligence must be completed before client discussion.
- Which issues go to counsel, tax, valuation expert, or industry specialist.
- What model or materials to build next.

## Adaptive outputs

### No context

Return:

- Intake checklist.
- Required documents.
- Skeleton debt stack and waterfall template.
- Clear statement that no recovery estimate can be reliable yet.

### Partial context

Return:

- Illustrative recovery waterfall.
- Assumption table.
- Source confidence labels.
- Diligence gaps.
- Sensitivities around value break.

### Full context

Return:

- Full claims register.
- Entity and collateral map.
- Valuation and liquidation framework.
- Waterfall by alternative.
- Fulcrum analysis.
- Plan feasibility.
- Recommendation and deliverable-quality output.

### Existing model

Return:

- Model audit summary.
- Preserved original workbook.
- New output or audit tabs.
- Change log.
- Formula and tie-out checks.