Leveraged Debt Restructuring Models

Introduction

You're facing high leverage and you need a repeatable way to reduce debt while keeping operations running and protecting stakeholder value - that's the direct goal. Leveraged debt restructuring means negotiated changes to debt terms - extending maturities, lowering rates, reducing principal, or swapping debt for equity - to restore solvency and rebuild financial flexibility. The primary objectives are simple and practical: extend runway so the business can execute, cut interest costs to free cash, and avoid value-destructive bankruptcy that wipes out equity and suppliers; one clean rule: preserve operating cash flow first. Here's the quick math in practice: shift near-term cash outflows to give your business breathing room. Next: Finance: prepare a 13-week cash view and a term-by-term restructuring model by Friday - owner: Treasury.

Key Takeaways

• Preserve operating cash flow first and extend runway to >12 months before value-destructive actions.
• Deliver a repeatable toolkit: 13‑week cash view plus a term‑by‑term restructuring model run in base, stress, and recovery scenarios.
• Judge proposals by creditor NPV (PV of new instruments vs existing) and by cash‑flow relief - prioritize moves that cut interest/cash outflows.
• Align stakeholders and sequencing early: map creditor classes, secure lock‑ups/consents, and set a clear execution timeline.
• Design clear covenants and monitoring (weekly cash, monthly covenant calcs, cure periods) to avoid technical defaults and litigation risk.

Core models and approaches

Debt-for-equity swap

You're trying to cut leverage without killing operations and you need shareholders to accept dilution so lenders take upside.

One-liner: swap debt for ownership when equity can absorb dilution and management keeps the business running.

When to use: prefer swaps where the business is viable operationally but balance-sheet insolvent, sponsors want continuity, and secured lenders see higher recovery through equity upside than forced liquidation.

Practical steps:

• Map capital stack: list secured, unsecured, mezz tranches and equity.
• Value the post-restructuring equity pool using a go-forward plan for 12-36 months.
• Propose conversion ratios linking principal forgiven to percent equity; show creditor dilution and residual sponsor stake.
• Include anti-dilution protections and milestone-based earnouts where needed.
• Set governance: board seats, veto rights, and liquidity gates for future rounds.

Best practices and checks:

• Run creditor NPV math: compare recovery as converted equity vs recovery under alternatives.
• Preserve operating covenants that don't throttle growth-avoid monthly micromanagement that kills execution.
• Use valuation collars or ratchets if macro volatility is high.
• Document tax consequences and P&L effects (debt forgiveness may create taxable income).

Example mechanics: assume a lender holds $100m face; offer conversion to 20% equity; show creditor NPV under base and upside cases and the dilution to existing shareholders. Here's the quick math: if post-restructure equity value is $200m, creditor gets $40m implied value vs forced liquidation of $15m. What this estimate hides: timing of value creation and new capital needs.

Distressed exchange with haircuts

You need to reduce headline debt quickly while giving creditors a market-tested instrument they can trade or hold.

One-liner: offer new paper at a haircut and optional cash to lower liabilities and extend maturities.

Use when bankruptcy avoidance is feasible and you can get a critical mass of holders to tender via consent solicitations.

Practical steps:

• Model a simple exchange term: new bond at X% of face + Y% cash or PIK (paid-in-kind) interest.
• Calculate immediate creditor recovery: Recovery = new bond market value + cash component.
• Estimate issuer benefit: reduction in face and coupon, extended maturities, and covenant reset.
• Run voting mechanics: identify required majorities under indenture for modifications.
• Prepare solicitation materials and fairness exhibits for holdout risk mitigation.

Best practices and negotiation levers:

• Use a sweetener for early tender: cash or short-term interest uplift.
• Segment offers by tranche: secured holders get better price than unsecured.
• Model holder economics with NPV and IRR vs litigation/bankruptcy outcomes.
• Build tranching to protect recovery on secured collateral and limit cross-default spillovers.

Simple math example: existing bond face $100. Offer new bond at 50% of face plus $10 cash today. Creditor immediate nominal recovery = $60. If new bond trades at a yield implying PV of $55, creditor effectively receives that's $55 in market value plus $10 cash = $65. Use scenarios: if bankruptcy expected recovery $40, the exchange is rational. Defintely model time to cash and trading liquidity.

Pre-packaged bankruptcy

You need speed and control: file court papers with creditor agreement already in hand to limit value leakage and legal fees.

One-liner: pre-pack shortens bankruptcy, reduces vendor disruption, and preserves going concern value when negotiated consents exist.

When it fits: when a large majority of creditors can be secured for a plan and expedited court approval reduces operating risk and financing costs.

Practical steps:

• Secure lock-ups and support agreements from key creditor classes before filing.
• Draft a plan of reorganization and disclosure statement aligned with negotiated terms.
• File simultaneously: petition, plan, and solicitation results to seek quick hearing.
• Coordinate DIP (debtor-in-possession) financing or interim liquidity to cover filing and working capital needs.
• Prepare a communications plan for vendors, customers, and employees to limit flight risk.

Best practices and legal/economic considerations:

• Obtain signed consents from creditors representing the required statutory majorities to bind holdouts.
• Model the cost savings: compare three-month pre-pack timeline vs typical 9-12 months Chapter process-estimate legal and financing savings.
• Test feasibility: if any critical creditor refuses, pre-pack may fail and force a longer Chapter process.
• Include release mechanics carefully; avoid overbroad third-party releases that antagonize trade creditors.

Operational checklist: ensure uninterrupted payroll, maintain supplier credit lines, and lock in essential contracts pre-filing. One concrete step: get support agreements from holders of at least the statutory majorities and file within 14-21 days to preserve momentum.

Key inputs and assumptions for leveraged debt restructuring models

You need three crisp input blocks - cash flow forecast, debt schedule, recovery assumptions - because those three determine runway, creditor NPV, and whether a deal preserves operating value. Here's the quick takeaway: get monthlies for the near term, map every debt line by legal priority, and stress recovery values with realistic legal and transaction costs.

Cash flow forecast: 12-36 month horizon, monthly granularity for near-term liquidity

Start with actuals through the latest available 2025 fiscal month and build a monthly cash model for at least 12 months; extend to 36 months for strategic planning. Monthly granularity is essential for the first 6-12 months because covenant tests and liquidity traps show up weekly.

Steps to build it

• Pull trailing 12 months P&L and cash receipts by day/month
• Project revenue drivers (price × volume) with explicit assumptions
• Model working capital changes: AR days, AP days, inventory turns
• Schedule operating cashflow items: payroll, rent, utilities, taxes
• Layer mandatory debt service and known one-offs (restructuring fees, vendor settlements)
• Include a committed financing line and realistic availability (consent timing eats availability)

Best practices

• Run three scenarios: base, stressed (example: -20% EBITDA), upside (example: +10% revenue)
• Use rolling 13-week views inside the 12-month model for weekly cash ops
• Flag covenant test dates and liquidity floors visually
• Keep formulas auditable: separate assumptions sheet, labeled drivers, and sensitivity toggles

Example math: if current monthly EBITDA is $5.0m, a -20% stress leaves $4.0m; if mandatory debt service is $4.5m, you have a $0.5m monthly shortfall to cover from revolver or restructuring. What this estimate hides: seasonality and timing of payables can double shortfalls in a given month.

One-liner: model monthlies until you can prove liquidity beyond 12 months or you need a covenant waiver, defintely be explicit about timing.

Debt schedule: maturities, interest margins, amortization, and secured vs unsecured buckets

Build a line-by-line debt register that ties to legal docs: tranche name, principal outstanding, currency, coupon specification (SOFR or alternative reference), margin, payment frequency, amortization schedule, maturity date, security/collateral, and intercreditor ranking.

Steps and fields to capture

• Instrument ID and CUSIP/ISIN where applicable
• Outstanding principal and accrued interest
• Coupon formula (example: SOFR + 350bps) and payment dates
• Amortization profile (bullet vs scheduled principal payments)
• Security: first lien, second lien, unsecured, subordinated
• Covenant mechanics tied to the tranche (restricted payments, cash sweep)

Modeling best practices

• Link principal and coupon cashflows to monthly cash forecast so interest is cash-paid or PIK (pay-in-kind) as allowed
• Separate secured and unsecured cash waterfalls; always model secured recovery cashflows ahead of unsecured
• Include contingent obligations: surety bonds, lease defeasance, guarantees
• Stress test rollover risk: show option-adjusted marginal cost to refinance each tranche

Example layout: Term Loan A - $300m outstanding, SOFR + 350bps, amortization $25m per year, maturity 2027; Senior Unsecured Notes - $150m, coupon 8.0%, bullet 2028. Link both to cash sweep rules and covenant breaches so you can see monthly liquidity impact.

One-liner: every restructuring hinges on whether the schedule stops a funding cliff; model the cliff month precisely.

Recovery assumptions: collateral liquidation values, recovery rates by tranche, legal and transaction costs

Recovery modeling converts asset/security pictures into creditor payback expectations. Start with an independent appraisal where possible and then apply market haircuts and time-to-realize discounts.

Key steps

• Inventory collateral by legal priority and jurisdiction
• Obtain broker/auction comps and recent judicial sale data
• Estimate liquidation timeline-90, 180, 360 days-and apply time-based discounts
• Estimate legal, advisory, and transaction costs as percent of gross proceeds

Reasonable working assumptions (market-informed ranges)

• Secured asset recoveries: typically 60-85% of carrying value in an out-of-court sale, lower in a fire sale
• Unsecured recoveries: often 10-40% depending on covenant priority and litigation risk
• Professional and transaction costs: out-of-court 3-7% of proceeds; formal insolvency 10-25%
• Discount recoveries to present value using a creditor-specific discount (e.g., required return or market spread)

Example calculation: secured collateral appraises at $100m. Apply a conservative market haircut of 25% → gross recovery $75m. Subtract legal/transaction costs at 6% ($4.5m) → net recovery $70.5m. Discount 180-day timing at a creditor hurdle of 12% annual (~6% for 6 months) → PV ≈ $66.5m. That PV is what secured lenders compare to outstanding face.

Best practices and caveats

• Run sensitivity on haircuts and timelines; litigation often cuts recoveries materially
• Validate appraisals against recent 2024-2025 market transactions in the same asset class
• Allocate carve-outs first: estate admin fees, DIP liens, and priority claims reduce creditor pools
• Document assumptions transparently-judges, committees, and bondholders will test them

One-liner: assume conservative haircuts, add realistic transaction costs, and discount for time - creditors live or die on the PV, so be explicit.

Modeling mechanics and calculations

Build pro forma waterfall operating cash to mandatory amortization

You're modeling a restructure because runway is tight and you need a deterministic cash priority schedule so creditors and management share a single source of truth.

Takeaway: produce a monthly waterfall for 12-36 months, with clear seniority and cash traps.

Practical steps

• Map cash sources: beginning cash, monthly EBITDA, working-capital changes, asset sales
• Order cash uses: taxes and priority fees → interest → operating expense (opex) → mandatory amortization → capex/reserves → discretionary
• Build monthly lines: beginning cash, inflows, each use, ending cash
• Flag covenants weekly: liquidity floor, DSCR (debt service coverage ratio), minimum EBITDA
• Stress test: run 0%, -10%, -20% cash shock scenarios to find month of covenant breach

Example quick math: assume fiscal 2025 LTM EBITDA is $120 million, total debt face $1,000 million, average coupon 8.0%. Current annual interest ≈ $80 million or monthly $6.67 million. If restructure cuts coupon to 6.0% on a reduced principal of $600 million, new monthly interest ≈ $3.0 million, freeing ~$3.67 million monthly (~$44 million annually) for opex or amortization.

Best practices

• Model monthly granularity for first 12 months, then quarterly to 36 months
• Link interest to actual principal outstanding; update after each amortization event
• Include a covenant waterfall: first test liquidity floor, then DSCR, then EBITDA trigger
• Build automatic traps: if ending cash < liquidity floor, model forced actions (capex cut, vendor holdback, emergency financing)

What this estimate hides: working-capital timing can move the breakeven month by 1-3 months; be conservative on receivables conversion.

Calculate present value of proposed deals discounting new instrument against existing face

You need a crisp comparison: what creditors would accept today versus what they hold in nominal face value.

Takeaway: compute the PV of the proposed instrument at a market-appropriate discount rate and compare that PV to the creditor's current economic claim (market price or carrying value).

Step-by-step

• Define the new instrument: principal, coupon, tenor, amortization, equity kicker (warrants), subordination
• Choose discount rate: base on market spreads for similarly rated stressed credits; example use 12.0% absolute yield for discounting
• Calculate PV: PV = PV(coupon annuity) + PV(principal repayment) for bullet or amortization schedule
• Compare: PV(new instrument) versus creditor's current economic position (market value or book)
• Express outcomes: recovery as PV / existing face, and implied haircut = 1 - recovery

Worked example quick math: exchange existing face $1,000 million for new bonds with face $600 million, coupon 6.0%, bullet in 5 years. Annual coupon = $36 million.

Discount at 12.0%: annuity PV factor ≈ 3.609, PV(coupons) = $129.9 million; PV(principal) = $340.4 million; total PV ≈ $470 million. Recovery = 47% of old face; implied haircut ≈ 53%.

Decision rule for creditors: accept if PV(new) > current market value of the old claim. Example: if current market value = $350 million, the exchange improves creditor economic value to $470 million, so it's accretive.

Best practices and caveats

• Use yield curves and CDS spreads to pick discount rates, not arbitrary percentages
• Adjust PV for expected recovery probability and legal/transaction costs (add a haircut for litigation risk)
• Price equity kickers separately with option pricing (dilution matters)
• Document assumptions: recovery timing, default probability, and macro rates

What this hides: discounting assumes full payment timing; if default triggers junior recoveries or acceleration, economic recovery moves materially-so add a default-adjusted scenario.

Scenario math base stress upside with NPV and IRR for creditors

You should present three clear scenarios so stakeholders can see downside pain and upside optionality.

Takeaway: run base, stressed, and upside models and show both NPV (creditor PV today) and IRR (expected annual return given current market price).

Scenario definitions (use monthly waterfall inputs)

• Base: fiscal 2025 LTM EBITDA = $120 million, stable margins, covenant compliance after restructure
• Stressed: EBITDA -20% → EBITDA = $96 million; delayed receivable conversion; higher default probability
• Upside: revenue +10% and margin holds → EBITDA ≈ $132 million

How to compute creditor NPV and IRR

• NPV: discount the instrument's cash flows under each scenario at the market required yield (example 12.0%) to get scenario PVs
• IRR: take the scenario cash flows and the creditor's current economic cost (market price or book) to solve for IRR
• Expected value: weight scenario PVs by probability to get probability-weighted PV

Worked scenario numbers (illustrative)

Assume creditor current market price = $350 million (35% of face); new bond cash flows as above: annual coupons $36 million, principal $600 million at year 5.

Base case: discount @ 12.0% → PV ≈ $470 million. IRR to creditor given purchase price $350 million ≈ 20% (trial shows ~20% yield since PV at 20% ≈ purchase price). One-liner: base IRR ~20%.

Stress case: assume increased default reduces expected principal repayment to $300 million at maturity and coupons are cut by 50% after year 2. Recalculate expected cash flows and discount at 12.0% → PV example ≈ $240 million. IRR from $350 million cost → negative or low single digits. One-liner: stress IRR ≈ 5% or worse.

Upside case: assume EBITDA +10%, company repays principal early or adds partial amortization reducing refinancing risk; expected extra equity kicker value increases expected recovery to PV ≈ $560 million. IRR from $350 million cost → ~30%+. One-liner: upside IRR > 30%.

Best practices for scenario math

• Keep scenarios simple and transparent: list assumptions for revenue, margin, capex, WC, and probability
• Run sensitivity tables: PV vs discount rate and PV vs principal recovery
• Show waterfall outputs for each scenario month-by-month so defaults trigger visually
• Present both creditor-centric metrics (NPV, IRR) and company-centric (runway months, covenant breach month)

What this estimate hides: IRR is highly sensitive to starting market price; small changes in default probability or timing can swing IRR by tens of percentage points-defintely call that out to creditors.

Next step: Finance: build the three-mode (base, stress, upside) monthly cash waterfall and PV/IRR table for creditors, deliver by Friday. Owner: Finance.

Covenant design and monitoring

You're tightening a capital structure while trying to keep operations running and avoid a value-destructive default, so covenants must be simple, measurable, and actionable. Here's a practical playbook you can implement this week.

Use clear triggers

Start with three primary, non-overlapping triggers: a liquidity floor, a minimum EBITDA covenant, and a debt service coverage ratio (DSCR) test. Keep triggers few so teams react decisively, not with analysis paralysis.

One clean line: tie each trigger to a single owner and an immediate escalation path.

Practical thresholds (example for a mid-market restructure where 2025 fiscal year revenue ≈ $200,000,000 and 2025 EBITDA ≈ $30,000,000):

• Set liquidity floor at $20,000,000 (cash + available revolver)
• Set minimum EBITDA at $18,000,000 trailing 12 months
• Set DSCR at ≥ 1.2x measured on last 12 months

Quick math: if interest + scheduled amortization = $15,000,000, require adjusted EBITDA ≥ $18,000,000 to hit DSCR ≈ 1.2x. What this estimate hides: seasonal swings and one-off receipts, so use trailing 12 months with a one-month lag.

Best practices:

• Measure on the same calendar dates
• Use standardized definitions (EBITDA = operating profit + D&A)
• Exclude agreed non-recurring items
• Assign CFO as owner for liquidity trigger

Include grace mechanics

Design cure periods, step-downs, and waiver budgeting so the debtor has room to fix operational misses without triggering immediate technical defaults. Be explicit about timing and cost. defintely prefer short, fixed windows over vague language.

One clean line: grace gives time, not free options.

Standard mechanics and numeric examples:

• Cure period: 30 calendar days for liquidity misses, 60 days for EBITDA breaches
• Step-downs: DSCR requirement can step from 1.3x to 1.2x for 12 months post-close
• Waiver fees: one-time fee 0.5% of outstanding principal; consent fee $250,000 for complex deals
• Waiver budgeting: reserve cash equal to expected fees plus $3,000,000 buffer for legal and financing costs

Implementation steps:

• Draft covenant language with explicit cure clocks
• Model cash impact of waiver fees in the 13-week
• Pre-agree a one-time step-down schedule in the term sheet

What to watch: long cure periods delay resolution and encourage repeat misses; short cure periods force quick renegotiation and higher legal risk.

Set reporting

Make reporting predictable, automated, and relevant: weekly cash, monthly covenant calculations, quarterly audited snapshots. Clear cadence eliminates surprises and gives creditors the confidence to extend runway.

One clean line: high-frequency cash, audited proof quarterly.

Required reports and suggested contents:

• Weekly cash pack: cash balance, major receipts/payments, variance to 13-week (1 page)
• Monthly covenant schedule: trailing 12-month EBITDA, DSCR calc, liquidity reconciliation (signed by CFO)
• Quarterly audited snapshot: balance sheet, income, cash flow (external audit)
• Exception reporting: immediate notice if any trigger breached

Practical steps to implement:

• Automate feeds from treasury system into a covenant dashboard
• Assign controller to run monthly covenant calc within 5 business days
• Agree format with lenders pre-close (template + sign-off fields)
• Schedule weekly call with lead lender while any covenant is under cure

Limitations: early-stage companies may lack audited numbers-use agreed interim reporting and frequent reconciliations until audits are current.

Finance: draft covenant dashboard, implement weekly cash pack, and deliver the first monthly covenant calc by Friday; CFO owns sign-off.

Negotiation sequencing and stakeholder map

Identify creditor classes: secured lenders, unsecured bondholders, trade creditors, sponsors

You need a clean claim map so you know whose vote moves the deal and where recovery value sits.

Start by classifying claims into legal priority and economics: secured lenders (first lien, typically recover 60-80% of collateral value), unsecured bondholders (recoveries often 0-40% in restructurings), trade creditors (short-term suppliers; recovery ranges widely, 10-50%), and sponsors (private equity owners or strategic parents, usually equity-first but may hold junior debt or provide new money).

Make a creditor matrix with these columns: claim type, legal docs, principal amount as of FY2025, coupon, maturity, security, lien priority, holder names and % of class, and any liens or guarantees. Use trustee records, loan tapes, and exchange listings to validate holdings; prioritize the top holders that together represent >50-75% of each class.

Here's the quick math: if bond class face is $100m, the top three holders that own $40m, $20m, and $10m equal $70m or 70% of the class - you only need to lock those to control an exchange.

What this estimate hides: beneficial ownership through custodians and omnibus accounts can mask voting power - verify via DTC, prime brokers, and 13F/13D filings when possible; defintely get sworn ownership affidavits for major holders.

Build voting strategy: lock-ups, consent fees, and required majorities under indentures

The direct rule: structure incentives so the minimum legal majorities are in your camp before you launch a formal solicitation.

Know the legal thresholds. For indenture amendments and many exchange offers, expect a required majority of holders by principal amount - commonly 66.67%. For Chapter 11 plan acceptance under US Bankruptcy Code §1126(c), a class must accept with at least 66.67% in amount and a majority in number of allowed claims in the class.

Use three levers to build support: lock-up agreements (pre-agreements to vote in favor), consent/engagement fees, and targeted economics. Typical market practice (FY2025 benchmarks): offer a consent fee of 1-5% of principal for bondholders who sign early; offer a commitment/exit fee or break fee of 0.5-3% for critical lenders; and sweeten with small cash pay pieces (e.g., $2-5 per $100 principal) where liquidity allows.

Operational steps:

• List the top 10 holders per class and their % of class.
• Run a vote-mapping model: show outcomes if top holders flip or hold out.
• Offer lock-up letters to the smallest set that satisfies the threshold under current indenture language.
• Define consent fee budget and approval path (Finance + Sponsor sign-off).

Here's the quick math: to get a 66.67% threshold on a $150m bond, you need holdout exposure ≤ $50m; tying up holders representing $101m removes leverage from dissenters.

What this estimate hides: intercreditor agreements and bond covenants may require different majorities for different actions; always read the specific indenture and intercreditor language before promising economics.

Execution plan: term sheet → solicitation → documentation → close; map timeline and cash traps

Run the deal as a set of short, parallel tracks: legal, creditor outreach, modeling, and cash management - keep them in lock-step and time-box each phase.

Typical timeline for a consensual exchange or prepack in FY2025:

• Term sheet negotiation: 7-14 days
• Creditor outreach / lock-ups: 7-28 days
• Solicitation and voting period: 14-30 days
• Documentation, legal sign-offs, regulatory filings: 7-21 days
• Close and settlement: 3-7 days

Prepackaged Chapter 11 where filings are needed commonly finishes in 30-60 days; hostile or litigated restructurings can extend to quarters.

Map cash traps and liquidity milestones in the plan document. Practical triggers:

• Trigger a cash trap if available liquidity falls below 1.5x monthly burn or runway 90 days.
• Require treasury to report weekly cash and three-line forecast; restrict discretionary spending once cash trap is active.
• Designate a DIP or exit lender approval threshold for release of trapped cash.

Example math: if your monthly cash burn is $12m, set a trap at $18m (1.5x) or runway 90 days which equals $36m required; if cash drops to $17m, the trap locks distributions pending creditor sign-off.

Execution checklist:

• Prepare a one-page term sheet with economics, covenants, and timing.
• Run parallel legal review of indentures and voting mechanics.
• Start creditor outreach with top holders and request signed lock-ups.
• Model vote outcomes and set consent-fee budget.
• Sequence documents: term sheet → offer docs → exchange/plan documents → regulatory filings → closing mechanics.

Here's the quick math on vote timing: if you need 66.67% and have top holders representing 55%, you must convert an additional 11.67% of the class via mid-tier holders; allocate 14-21 days for that conversion.

Owner and next step: you run three modeled scenarios (base, stress, recovery) and assign Finance to deliver a vote-mapping model, term sheet draft, and a 13-week cash view by Friday; Legal: prepare lock-up and consent templates.

Conclusion

Simple decision rule

You should accept a restructuring only if it raises creditor net present value (NPV) and pushes the company's cash runway beyond 12 months. This is the clean, operational test that separates value-preserving deals from cosmetic fixes.

Steps to apply the rule:

• Calculate current claim PV using instrument cash flows and current market spreads.
• Model the proposed instrument cash flows (coupon, principal, equity kicker, maturities).
• Discount the proposed instrument at an appropriate market spread to get PV(new).
• Accept if PV(new) > PV(existing) for the marginal creditor class and projected cash runway ≥ 12 months.

Here's the quick math: Creditor NPV change = PV(new instrument) - PV(existing claim).

What this estimate hides: legal priorities, intercreditor subordination, and contingent claims (leases, pensions) that can shift recovery values quickly; adjust PVs for those before you sign.

One-liner: accept restructurings that increase creditor NPV and extend runway past 12 months.

Main risks and mitigations

Restructuring is fast money math plus slow legal risk - you must manage both. The main risks are litigation, imperfect information, covenant creep, and funding cliffs; each needs a clear mitigation path before execution.

• Litigation risk - creditors or trustees sue over preference, fraudulent transfer, or cramdown. Mitigate with thorough diligence, release language, DIP (debtor-in-possession) financing commitments, and backstops. Add a litigation reserve to recovery math.
• Imperfect information - noisy cash forecasts and overstated collateral. Require third-party valuations for key collateral and run a 13-week rolling cash model with weekly updates.
• Covenant creep - new covenants silently tighten access. Use explicit cure mechanics, step-down schedules, and cap material adverse change (MAC) triggers; get waiver fees only for measured cures.
• Funding cliffs - missed bridge notes or DIP draws cause a run. Insist on committed liquidity facilities, escrowed fees, and milestone-based tranche releases to remove cash traps.

Practical thresholds: trigger independent valuation if recovery assumption swing > ±10%; set liquidity floor at a minimum of 30 days of operating cash burn; require legal sign-off if expected litigation costs > 5% of projected recoveries.

One-liner: map legal and cash risks into reserves, valuation haircuts, and deal protections before you greenlight a deal.

Next steps and owners

You run three modeled scenarios - base, stress, recovery - and assign Finance to deliver a model pack by Friday. The pack must be actionable: numbers, assumptions, sensitivities, and a recommended yes/no decision per creditor class.

Deliverable checklist for Finance (due Friday):

• Full model: 0-36 months cash flow, monthly granularity for first 12 months.
• Scenario runs: Base, Stress (EBITDA -20%), Recovery (Revenue +10%).
• Creditor NPV table: PV(existing) vs PV(proposed) by tranche, discount curves and spreads used.
• 13-week cash plan and liquidity runway chart showing when runway crosses 12 months.
• Pro forma cap table and dilution schedules for any debt-for-equity swaps.
• Assumptions memo: valuation reports, collateral values, legal cost estimates, and sensitivity toggles.

Timeline and owners:

• You: finalize assumptions and consent strategy by Wednesday.
• Finance: deliver model pack and memo by Friday (owner: Finance lead).
• Legal: prepare term sheet and preliminary release language by next Monday.

One-liner: run the three scenarios now, get Finance to produce the model pack by Friday, and use the creditor NPV + runway test to decide.