Restructuring Interview Questions: Chapter 11, Fulcrum Security, and DIP Financing
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Why Restructuring Interviews Are Different
Restructuring interviews test credit analysis and legal process knowledge in addition to standard valuation and accounting. You need to understand how capital structures work under stress, what happens when a company cannot service its debt, and who gets what in a reorganisation.
Chapter 11: The Key Stages
1. Filing: The company files a voluntary petition. An automatic stay immediately stops all creditor collection actions.
2. DIP financing: The company secures new financing to operate during proceedings. DIP lenders get super-priority status — they are repaid first.
3. Creditor committees: The US Trustee oversees formation of an Official Committee of Unsecured Creditors (UCC), which hires its own advisors.
4. Plan of reorganisation: Specifies how each class of creditors is treated. Classes vote; if approved by sufficient majorities, the court confirms it. If a class dissents, the court can use cram-down (Section 1129(b)) to force confirmation.
5. Emergence: The company exits Chapter 11 with a new capital structure and new equity distributed to former creditors.
Fulcrum Security
The fulcrum security is the tranche of debt at the boundary between full recovery and impairment. Creditors above it get paid in full. Creditors below get nothing. The fulcrum holders typically become the new equity owners of the reorganised company.
How to identify it: Calculate enterprise value in distress. Work down the capital structure tranche by tranche. Where the value runs out — that is the fulcrum.
DIP Financing
DIP (Debtor-in-Possession) financing keeps the company alive during Chapter 11. It gets super-priority over all pre-petition claims. Without DIP financing, the company must liquidate immediately (Chapter 7).
DIP is usually provided by existing lenders (to protect their position) or specialist distressed lenders. It typically carries a 2-4% exit fee.
Common Interview Questions
"What is the difference between Chapter 11 and Chapter 7?" — Chapter 11 is reorganisation (the business continues). Chapter 7 is liquidation (assets are sold and the business ceases).
"Why would a creditor prefer Chapter 11 over Chapter 7?" — Because the going-concern value of a business is almost always higher than its liquidation value. Reorganisation preserves more value for creditors.
Take Your Preparation Further
For a complete guide to restructuring concepts, interview questions, and firm-specific intelligence for Evercore RX, Houlihan Lokey, and Lazard, see the Restructuring Primer. Download our free EV Bridge Cheat Sheet for the capital structure fundamentals.
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