A non-pro-rata uptier on a $500M first-lien term loan, worked through the waterfall at five enterprise values against the same new money lent pro rata.
An uptier moves value from the lenders outside the room to the lenders inside it, and the amount is a waterfall calculation. When a 55 per cent group lends $100M of super-senior money and rolls its loans ahead at 90, then at $400M of enterprise value the excluded lenders recover 23.3 cents against 60.0 had the same money been lent pro rata, while the group recovers 90.0. That is $82.5M moved between holders of the same loan.
Worked in full in The Distressed Debt Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A sponsor-owned company has a $500M first-lien term loan, pari passu across all lenders, and $150M of unsecured notes behind it. It needs $100M of liquidity. A group holding 55 per cent of the term loan, enough to amend the credit agreement on a simple majority vote, offers the money on two conditions: the new money ranks ahead of the existing loan, and the group may exchange its own old loans into a second-out super-senior tranche, at 90 cents on the dollar of claim. The other 45 per cent are not invited. All figures are illustrative.
| Input | Value |
|---|---|
| First-lien term loan | 500.0 |
| Held by the group (55%) | 275.0 |
| Held by excluded lenders (45%) | 225.0 |
| Super-senior new money, spent before exit | 100.0 |
| Exchange price of the group's old loans | 90 cents |
| Rolled second-out claim (275.0 × 90%) | 247.5 |
| Unsecured notes | 150.0 |
The fair benchmark is not the capital structure before the deal: without the liquidity, the company might not reach any exit. It is the same $100M lent pro rata, by every term lender in proportion to its holding, also ranking first. In both routes the money is spent before the exit, so the enterprise value available to creditors is identical and any difference in recoveries is a transfer, not value created.
Pro rata: New money 100 → Term loan 500 (all lenders) → Unsecured 150
Uptier: New money 100 → Group's rolled claim 247.5 → Excluded lenders 225.0 → Unsecured 150
Each tranche takes MIN(value remaining, its claim). Excel, for a tranche whose claim is in C5 with the value left after the tranches above in B5: =MIN(B5, C5), then =B5-D5 passes the remainder down.
At $400M of enterprise value the pro rata route repays the new money and leaves 300.0 for a term loan of 500.0: 60.0 cents for every lender. In the uptier the new money takes 100.0, the group's rolled claim takes all 247.5, and the excluded lenders share the 52.5 that is left: 23.3 cents. The group's 247.5 against a holding of 275.0 is 90.0 cents. Group gain 247.5 less 165.0 = 82.5; excluded loss 135.0 less 52.5 = 82.5. The sum is zero, as it must be.
| Enterprise value | Pro rata, all lenders | Uptier, group | Uptier, excluded | Transfer to group | Unsecured gain |
|---|---|---|---|---|---|
| 300 | 40.0 | 72.7 | 0.0 | 90.0 | 0.0 |
| 400 | 60.0 | 90.0 | 23.3 | 82.5 | 0.0 |
| 500 | 80.0 | 90.0 | 67.8 | 27.5 | 0.0 |
| 600 | 100.0 | 90.0 | 100.0 | −27.5 | 27.5 |
| 700 | 100.0 | 90.0 | 100.0 | −27.5 | 27.5 |
The shape is the trade. The group gives up 10 points in the good outcomes, where it would have been repaid at par, and that 27.5 of exchange discount falls through to the unsecured notes. In exchange it gets near immunity in the bad ones: its recovery stays at 90.0 cents all the way down to $347.5M of value and is still 72.7 at $300M. At $347.5M the excluded lenders are wiped out, where on a pro rata deal the term loan would still recover 49.5 cents. Their claim is impaired below $572.5M; the group's only below $347.5M.
For a distressed buyer the uptier is not one risk among several; it is a repricing of the claim. An excluded holder who paid 60, the pro rata value at $400M, now holds something worth 23.3: a loss of 61.1 per cent of the position on a document amendment, with no change in the business.
| Variant | Group recovery | Excluded recovery |
|---|---|---|
| Exchange at 100 | 100.0 | 11.1 |
| Exchange at 90 (base case) | 90.0 | 23.3 |
| Exchange at 80 | 80.0 | 35.6 |
| Group of 51%, exchange at 90 | 90.0 | 28.8 |
| Group of 67%, exchange at 90 | 89.6 | 0.0 |
Two levers matter. The exchange price sets how much claim jumps the queue: at par the excluded lenders recover 11.1 cents, at 80 they recover 35.6. And the size of the group cuts both ways. A bigger group leaves fewer lenders to pay for it, but more claim ahead of them: at 67 per cent the rolled claim is 301.5, the senior stack exceeds $400M, and the excluded third recover nothing while the group still takes 89.6. Recruiting beyond the majority it needs barely changes the group's own recovery, but it pushes the excluded lenders' recovery towards zero.
Comparing the excluded recovery with the pre-deal capital structure, 80.0 cents at $400M with no new money ahead, overstates the damage: part of the drop is simply the new money, which the company needed whoever lent it. Comparing with the group's 90.0 overstates it too: that 66.7-point gap counts the same $82.5M twice, once as the group's 30.0-point gain and once as the excluded lenders' 36.7-point loss against the pro rata route. The transfer is measured against the pro rata alternative, and it depends steeply on enterprise value: $90.0M at $300M, nothing above $600M. A manager who quotes one figure without the value it assumes has not priced the risk.
Whether the amendment is allowed at all depends on the documents: the sacred rights requiring every affected lender's consent, the definition of pro rata sharing, any open-market-purchase exception. Courts have reached different conclusions on these exchanges, and newer agreements increasingly block them. That is the legal question. The arithmetic above is what tells you how much it is worth.
The waterfall that re-identifies the fulcrum as enterprise value moves is in the free workbook for this case, and the second of its three new cases works a priming uptier with a majority and a minority on the same claim. For the waterfall itself, see whether the fulcrum security moves with enterprise value.
A liability management exercise in which a majority of lenders amends the credit agreement to allow new debt ranking ahead of the existing loan, then exchanges its own loans into that senior debt. The excluded minority keeps its old claim, now subordinated. In the worked case a 55 per cent group moves $247.5M of claims ahead of the remaining $225.0M.
A discount, here 90 cents, makes the exchange look like a purchase below par and reduces the senior claim, which leaves some value for juniors at high enterprise values. The group gives up 10 points if the company recovers fully but at $400M of enterprise value it recovers 90.0 cents instead of 60.0 on a pro rata deal.
When value no longer covers the new money and the rolled claims ahead of it. With $100M of new money and $247.5M of rolled claims, the excluded lenders recover nothing below $347.5M of enterprise value. Had the new money been lent pro rata, the whole term loan would recover something at any value above $100M.
This article is one calculation from The Distressed Debt Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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