Fulcrum Security

The fulcrum security is the class in the capital structure where value "runs out" in a restructuring — the most senior claim that is not fully covered by enterprise value (i.e., is impaired). Under the priority waterfall, classes above the fulcrum are (near) fully recovered, classes below get little or nothing, and the fulcrum class typically converts its claims into the equity of the reorganized company.

Locating the fulcrum is a valuation exercise: compare the estimated enterprise value to the cumulative claims down the waterfall. Example: EV of $700mm against $500mm of first-lien debt and $400mm of unsecured notes — the first lien is covered, value runs out partway through the notes, so the unsecured notes are the fulcrum and become the new equity.

Distressed investors hunt the fulcrum because it offers control of the post-reorg company and equity-like upside at a debt-like entry price. The fulcrum shifts with the valuation, which is why valuation fights are the central battle in contested Chapter 11 cases.