Restructuring Interview Questions: Chapter 11, Fulcrum Security, and DIP Financing
Michael King, PE Investment Manager · 8 min read · (updated )
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.
For the other specialist coverage group with its own technical vocabulary, see FIG Banking Explained. For the credit side of every restructuring — the lenders running the workout from the other side of the table — see Private Credit Explained.
Ready for personalised feedback? Book a 1-on-1 mentoring session with an experienced IB/PE professional.
Frequently asked questions
What is the fulcrum security?
The tranche of debt sitting at the boundary between full recovery and impairment. Creditors ranking above it are paid in full; those below recover nothing. Fulcrum holders typically convert into the equity of the reorganised company, which is why identifying the fulcrum is the central analytical task in distressed investing — it tells you which piece of paper turns into ownership.
How do you identify the fulcrum security?
Value the enterprise in distress, then work down the capital structure tranche by tranche, allocating that value in order of priority. The tranche at which the value runs out is the fulcrum. The difficulty is rarely the arithmetic — it is the enterprise value estimate, since a distressed business is being valued precisely when its forecasts are least reliable and the parties have opposing incentives to argue it up or down.
What are the stages of a Chapter 11 process?
Filing a voluntary petition, which triggers an automatic stay halting all creditor collection. Securing debtor-in-possession financing to keep operating. Formation of an official committee of unsecured creditors, overseen by the US Trustee, which retains its own advisers. Negotiating a plan of reorganisation specifying treatment of each creditor class, which classes then vote on. Then emergence with a new capital structure and equity distributed to former creditors.
What is DIP financing and why does it rank first?
Debtor-in-possession financing is new money lent to keep the company operating during Chapter 11, and it carries super-priority over all pre-petition claims. Without it the company would have to liquidate under Chapter 7 immediately, so the priority is the price of keeping the business alive — no lender would fund a bankrupt borrower otherwise. It is usually provided by existing lenders protecting their position or by specialist distressed funds, and typically carries a 2-4% exit fee.
What is a cram-down?
The court confirming a plan of reorganisation over the objection of a dissenting creditor class, under Section 1129(b). It prevents a single class holding the whole reorganisation hostage, provided the plan is fair and equitable and does not discriminate unfairly against that class. Its existence shapes negotiation: parties bargain in the shadow of what a court would impose.