Distressed Debt Case Study: Interview Example

A distressed debt case study asks you to value a struggling company, run a recovery waterfall through its capital structure, find the fulcrum security and decide whether a bond or loan is cheap at its market price. Most cases end with a buy, sell or pass recommendation on one tranche.

For you, the test is whether you can turn a recovery range into a return and a clear call under time pressure. Spend your time on the logic and the call, and keep formatting simple.

This guide walks through the standard format, then a full worked example with numbers you can copy into your own practice model.

What you need to know before the case

A distressed case rests on a few legal and credit ideas. You should be able to explain each one in a sentence.

• Enterprise value (EV): the value of the operating business available to all claimholders. In a restructuring you usually value it on forward EBITDA times a multiple.
• Absolute priority: senior claims are paid before junior ones. Under section 1129(b) of the US Bankruptcy Code, if a dissenting unsecured class is not paid in full, no junior claim or interest may receive or retain property under the plan.
• Secured and unsecured claims: under section 506(a), a lender’s claim is secured up to the value of its collateral and unsecured for any shortfall. That shortfall is the deficiency claim.
• Fulcrum security: the class where value runs out. PitchBook quotes Beach Point Capital’s Allan Schweitzer defining it as “the loan or bond most likely to be converted into equity ownership through a restructuring.”
• Best interests test: section 1129(a)(7) requires each holder in an impaired class to receive at least what it would get in a liquidation. This sets the floor in your downside case.

Distressed debt case study format

A typical case gives you a company description, a capital structure with market prices and a set of financials. You then build a short model and a few slides with a recommendation on one part of the capital structure.

The case is often followed by two discussions. In one, an interviewer reviews your model and slides. In the other, you present your call and defend it against pushback.

Your output should cover five things:

1. Situation: why the company is distressed and how long its liquidity lasts.
2. Valuation: a restructuring EV range with the multiple and EBITDA you used.
3. Waterfall: recovery for each class in cents on the dollar across your range.
4. Returns: MOIC and IRR for the tranche you recommend, based on today’s price.
5. Recommendation and risks: buy, sell or pass, plus what would change your mind.

Worked example: a full distressed debt case study

The company and all figures below are illustrative. Use them to practise the steps in order.

Assumptions:

• EBITDA: $100m last twelve months, forecast to fall to $90m next year.
• First lien: $50m drawn revolver plus a $400m term loan, $450m in total. The term loan trades at 85.
• Unsecured notes: $300m, trading at 40.
• Total debt: $750m, which is 7.5x last twelve months EBITDA.
• Priority and administrative claims: $20m, treated as paid ahead of all lenders. This is a common case simplification.
• Timeline: 1.5 years to emergence. Coupons are ignored to keep the maths clean.

Step 1: Value the business

Use forward EBITDA, because the business you are buying into is the one after the decline. Run three multiples to build a range.

Low case EV = 6.0x x $90m = $540m.

Base case EV = 6.5x x $90m = $585m.

High case EV = 7.0x x $90m = $630m.

Step 2: Deduct claims that rank ahead of lenders

Subtract priority and administrative claims to get the value distributable to lenders.

Low case = $540m – $20m = $520m.

Base case = $585m – $20m = $565m.

High case = $630m – $20m = $610m.

Step 3: Run the recovery waterfall

Pay the first lien in full first, then give what is left to the notes.

Notes value in low case = $520m – $450m = $70m.

Notes value in base case = $565m – $450m = $115m.

Notes value in high case = $610m – $450m = $160m.

The notes are the fulcrum in every case. They are the first class not repaid in full, so they would receive most or all of the reorganised equity.

Step 4: Find the multiple the market is pricing

Work backwards from the notes price to the EV it implies. This single number makes your recommendation much sharper.

Value needed for 40 cents = 0.40 x $300m = $120m.

Implied EV = $120m + $450m + $20m = $590m.

Implied multiple = $590m / $90m = 6.56x.

The market is pricing the notes at roughly your base case. Buying them is a bet that the business is worth more than 6.56x forward EBITDA.

Step 5: Calculate returns

Returns run off the price you pay, so compare each tranche on cost. The notes recover in reorganised equity, so these returns assume that equity is worth plan value at emergence.

Notes, high case MOIC = 53.3 / 40 = 1.33x, IRR over 1.5 years = 21.1%.

Notes, low case MOIC = 23.3 / 40 = 0.58x, IRR over 1.5 years = -30.2%.

Notes, base case MOIC = 38.3 / 40 = 0.96x, IRR over 1.5 years = -2.8%.

Term loan, all cases MOIC = 100 / 85 = 1.18x, IRR over 1.5 years = 11.4%.

Step 6: Make the recommendation

A strong answer would be to buy the term loan at 85 and pass on the notes at 40. The term loan recovers par in all three cases and earns 11.4% before coupon. The notes lose money in the base case and range from a 30% loss to a 21% gain.

The first lien is only impaired if EV falls below $470m, or 5.22x forward EBITDA. Expect the obvious question of why a covered loan trades at 85. The answer is the risk of new debt being placed ahead of it in an uptier, plus thin trading in the loan. An oversecured lender can also claim interest under section 506(b), which adds to the return.

Then list what would change the call. For the notes, that is evidence EBITDA stabilises above $90m. For the term loan, it is any sign of new debt being placed ahead of it.

What do interviewers test in a distressed debt case study?

The maths above is the entry ticket. The discussion is where candidates win or lose the offer.

Expect pushback on these points:

• Your multiple: why 6.5x? Tie it to comparable companies or recent distressed sales, and show how far the multiple must move to change your call.
• Document risk: PitchBook notes that after liability management exercises “the fulcrum can move.” An uptier can place new superpriority debt ahead of a secured class, and a drop-down can move assets out of the lenders’ reach, as J.Crew did with $250m of intellectual property in 2016.
• Liquidity and timing: how many months of cash the company has and when it is likely to file. A longer process erodes EV and delays your return.
• Process mechanics: who controls the plan and how votes work. The US Courts guide to Chapter 11 sets out a 120-day exclusive period for the debtor to file a plan, extendable to 18 months.
• Voting control: a class accepts a plan when creditors holding two-thirds in amount and more than half in number of the allowed claims that vote accept it. Owning more than a third of a class by amount gives you a blocking position. At least one impaired, non-insider class must accept for the plan to be confirmed.

Liability management has changed the questions. Moody’s counted 125 defaults in 2025, with distressed exchanges at a record share. First Trust reported Moody’s global speculative-grade default rate at 4.3% at the end of May 2026, close to the 4.2% historical average. Expect at least one question on out-of-court exchanges.

Harder variations of the case

Once you can run the base case, practise the twists interviewers add.

• Undersecured first lien: if distributable value falls below $450m, the first lien’s shortfall becomes an unsecured deficiency claim under section 506(a). It then shares with the notes, which cuts their recovery further.
• Pari passu trade claims: suppliers owed money rank alongside the notes unless the plan treats them separately. Add them to the unsecured pool and recalculate.
• New money: the US Courts guide explains that a debtor may borrow with court approval and give the lender superpriority or a lien. A debtor-in-possession loan typically ranks ahead of pre-petition claims, and ahead of the existing first lien too if the court approves a priming lien.
• Liquidation floor: run a liquidation value to check the best interests test and set your downside.

For more practice, work through our restructuring interview questions, the debt-for-equity swap case study and our breakdowns of the Serta uptier and the J.Crew trapdoor. Our guide on how to write a credit memo helps with the slides. If you want structured modelling practice before a test, Wall Street Oasis courses offer guided financial modelling training.

FAQ

How long is a distressed debt case study?

Distressed debt case studies can be a timed exercise of a few hours or a take-home over several days. Both formats ask for a short model and a few slides with a recommendation. Plan your time so the waterfall and returns are finished early, leaving room to write the risks and the call.

What is the fulcrum security in a distressed case?

The fulcrum security is the first class in the waterfall that is not repaid in full in cash or new debt. It usually receives most of the reorganised equity. In the worked example, the $300m unsecured notes are the fulcrum because the first lien recovers par in every valuation case.

Should I recommend buying the fulcrum security?

Buy the fulcrum only when its price implies a lower EV than you believe. In the example, the notes at 40 imply 6.56x forward EBITDA, close to the base case, so the trade has little margin of safety. A senior tranche with full recovery at a discount can offer a better risk-adjusted return.

Conclusion

A distressed debt case study comes down to five steps: value the business, run the waterfall, find the fulcrum, back out the multiple the market is pricing and compare returns on cost. Finish with a clear call and the two or three facts that would change it.

P.S. If you are building this for an interview, start with the Excel Test – Distressed Debt. Browse our Premium Resources for additional tools, and join the Private Equity Bros newsletter for weekly finance updates and the latest financial reports.

Sources

• Chapter 11 – Bankruptcy Basics
• 11 U.S. Code § 1129 – Confirmation of plan
• 11 U.S. Code § 506 – Determination of secured status
• Who moved distressed debt investors’ fulcrum
• Factoid – Monday, June 22, 2026
• Moody’s Ratings: Global defaults fell in 2025, with distressed exchanges at record share