Claims Waterfall

The claims waterfall is the priority ordering in which a distressed company's value is distributed to claimholders: super-priority and secured claims first (DIP financing, then first-lien secured up to collateral value), then priority and administrative claims, then unsecured claims (including any secured deficiency claims), then subordinated debt, then preferred equity, and finally common equity.

Recovery analysis distributes an assumed enterprise (or liquidation) value down this waterfall to estimate each class's percentage recovery. Secured creditors are secured only up to the value of their collateral; any shortfall becomes an unsecured deficiency claim that ranks alongside general unsecureds.

Complications that move real recoveries away from the textbook waterfall: structural subordination (claims at operating subsidiaries recover from those entities before holdco creditors), guarantees, intercreditor terms, and negotiated settlements or "gifts" made to speed plan confirmation.