Priority waterfall

The order in which claims are paid when a company is wound up. Secured creditors first, then the various classes of unsecured, then preference shares, and equity last with whatever is left, which is usually nothing.

In India the order is set out in the insolvency code; in the United States it is the absolute priority rule under Chapter 11.

The practical use of the waterfall for an analyst is finding the fulcrum security, meaning the layer at which the recovery runs out. Everything above it is money-good and everything below it is worthless, and the fulcrum is where a distressed investor takes a position because that is the claim that converts into the equity of the reorganised company.

Build the stack in rupees before forming a view on any distressed situation.