modeling-chapter-11-recovery-waterfalls

name	modeling-chapter-11-recovery-waterfalls
description	Builds recovery waterfall models with absolute priority, secured vs unsecured claims, and plan of reorganization distribution analysis. Use when modeling bankruptcy recoveries, analyzing claim priorities, or estimating creditor distributions.
tags	["modeling","distressed-and-restructuring","credit"]
metadata	{"author":"casemark","practice_areas":["Restructuring","Distressed Investing","Turnaround"],"document_types":["Financial Model"],"skill_modes":["Modeling","Forecasting"]}

Modeling Chapter 11 Recovery Waterfalls

Builds recovery waterfall models that distribute enterprise value across claim classes following absolute priority, estimating cents-on-the-dollar recovery for each creditor tier under a plan of reorganization or liquidation scenario.

When To Use

• Estimating creditor recoveries under a proposed Chapter 11 plan of reorganization
• Comparing reorganization vs. Chapter 7 liquidation outcomes (the "best interests" test)
• Pricing distressed debt by modeling recovery at various enterprise value assumptions
• Evaluating the fulcrum security (the class where value breaks)
• Supporting disclosure statement preparation or plan confirmation arguments
• Stress-testing recovery sensitivity to valuation, claim amounts, or priority disputes

Inputs To Gather

• Claims register / proof-of-claim summary: All filed claims by class — secured, priority, general unsecured, subordinated, equity interests. Include disputed or contingent claims with estimated allowed amounts.
• Collateral valuations: Appraised or estimated values for each collateral pool securing a secured claim (real property, equipment, receivables, IP). Distinguish between going-concern and orderly-liquidation values.
• Enterprise or asset value range: Low / base / high valuation scenarios. Source from DCF, comparable transactions, or liquidation analysis as appropriate.
• DIP facility and administrative claims: DIP loan balances, accrued professional fees (debtors' counsel, UCC counsel, financial advisors), U.S. Trustee fees, cure costs.
• Plan treatment terms: Any negotiated recoveries, equity tips, gifting structures, or class-skipping provisions in the proposed plan [VERIFY — plan terms are case-specific].
• Intercompany claims and structural seniority: Entity-level debt placement if multi-entity debtor group; substantive consolidation status.
• Executory contract / lease cure amounts: Assumed or rejected contracts and corresponding cure or rejection damage claims.

Workflow

1. Map the priority stack

   • Order all claims by Bankruptcy Code priority: § 507 priority claims (admin expenses, wage claims, tax claims), then secured claims (to extent of collateral value), general unsecured, subordinated, equity.
   • For secured creditors, bifurcate under § 506(a): secured portion (up to collateral value) and deficiency claim (unsecured).
   • Identify any intercreditor subordination agreements that contractually re-order the statutory waterfall [VERIFY — subordination terms vary by agreement].

2. Build the waterfall schedule

   • Row structure: one row per claim class, ordered by priority.
   • Column structure: claim amount | cumulative claims | available value | distribution | recovery %.
   • Distribute available value top-down: each class receives the lesser of its allowed claim or remaining distributable value before the next class is paid.
   • For classes receiving partial recovery, calculate pro-rata distribution across claimants within the class.

3. Model secured claim recoveries separately

   • Each secured class waterfall runs against its specific collateral pool, not the general estate.
   • Apply adequate protection payments already made during the case as offsets.
   • If collateral value exceeds the secured claim, the surplus flows back to the general estate.

4. Run valuation scenarios

   • Build at least three scenarios (low / base / high enterprise value) to show how recovery shifts across classes.
   • Identify the fulcrum security — the most senior class that receives less than full recovery. This is the class with the greatest negotiating leverage and option value.
   • Calculate breakeven enterprise value for each class to achieve par recovery.

5. Incorporate plan-specific adjustments

   • Equity tips or carve-outs negotiated for junior classes despite absolute priority.
   • Convenience class thresholds (small claims paid in full to reduce administrative cost).
   • Rights offerings, backstop commitments, or new-money investment tranches that affect distributable value.
   • Tax attributes (NOLs, § 382 limitations) that affect post-emergence equity value [VERIFY — NOL availability depends on ownership change analysis].

6. Perform the best-interests test

   • Build a parallel Chapter 7 liquidation waterfall using orderly-liquidation collateral values and estimated Chapter 7 trustee fees / wind-down costs.

Output

• Recovery waterfall table: Claim class | Allowed claim amount | Distribution amount | Recovery % — across all scenarios.
• Fulcrum security identification: State which class is the fulcrum and at what enterprise value the fulcrum shifts.
• Sensitivity matrix: Recovery by class across a range of enterprise values (e.g., $50M increments).
• Best-interests comparison: Side-by-side plan vs. liquidation recovery for each class.
• Key assumptions summary: Valuation methodology, disputed claim treatment, subordination mechanics, and plan-specific adjustments applied.

Quality Checks

• Waterfall distributions must sum exactly to total distributable value — no leakage or rounding gaps.
• No junior class receives any distribution while a senior class is impaired (unless an equity tip or gift is explicitly modeled and labeled).
• Secured claim bifurcation matches collateral valuations; deficiency claims flow correctly to the unsecured pool.
• Administrative and priority claims are fully satisfied before any distribution to general unsecured creditors [VERIFY — confirm no § 1129(a)(9) waiver].
• Recovery percentages are bounded 0–100% per class; cross-check that weighted average recovery across all claims equals total distributable value / total allowed claims.
• Scenario outputs move directionally as expected — higher enterprise value should weakly increase recovery for each class.
• All disputed, contingent, or unliquidated claims are flagged with estimated allowed amounts and marked [VERIFY].