AI for Distressed Debt: Claude Tools for Restructuring and Distressed Investing Analysis

Distressed Debt Analysis and AI

Distressed investing involves analyzing companies in financial distress or bankruptcy to identify securities trading below their intrinsic recovery value. Restructuring advisors help companies and creditors negotiate out-of-court workouts or Chapter 11 plans. Both require deep analysis of capital structures, enterprise value, recovery waterfalls, fulcrum security identification, and plan feasibility. Claude with ClaudeFinLab accelerates the financial modeling and document analysis central to distressed situations.

Recovery Analysis and Waterfall

• "Recovery waterfall for this distressed company: total claims = first lien secured $180M + second lien $60M + senior unsecured notes $120M + trade/unsecured $42M + equity $0 (wiped out in most scenarios). Estimate enterprise value in three scenarios: (A) reorganization value at 5x stress EBITDA $28M = $140M; (B) reorganization at 6x = $168M; (C) liquidation at 4x = $112M. Show recovery by tranche in each scenario. At what EV does each tranche go from full recovery to impaired?"
• "Fulcrum security identification: EV scenarios $112M-$168M. Claim stack: first lien $180M, second lien $60M, unsecured $120M+. At EV = $140M: first lien receives $140M / $180M = 77.8 cents → impaired. Second lien receives $0. Unsecured: $0. The fulcrum is in the first lien at mid-case EV. First lien holders control the reorganization plan because they are the deepest-impaired class with recovery. Strategy: buy first lien bonds at a discount to par (trading at 62 cents) — if reorganization EV is $140M, implied recovery is 77.8 cents. Entry at 62 cents → upside of 25.5%."
• "Recovery bridge: company's EV = $140M. Claims: first lien $180M (DIP supersedes in Chapter 11 → paid first if DIP rolled in). Assume no DIP. First lien recovers $140M / $180M = 77.8% → bonds worth 77.8 cents on dollar. Second lien: $0 recovery. Equity: $0. But: if restructuring creates $25M of value via cost cuts post-reorg, reorganized EV = $165M. First lien full recovery at $165M: $165M / $180M = 91.7% → bonds worth 91.7 cents. Buy at 62 cents → 48% upside."

Out-of-Court Restructuring

• "Distressed exchange analysis: company has $120M of 8.5% senior notes trading at 72 cents ($86.4M market value). Company proposes: exchange $1,000 face of old notes for $750 face of new notes (7.5% coupon, 5-year maturity) + $200 of equity. Accept/reject decision for noteholder: old note = $1,000 face at 72 cents = $720 market value. New note $750 face — if new note trades at 85 cents (distressed but more manageable capital structure) = $637.5. Equity strip: estimated at $80 (based on reorganized equity value). Total consideration: $637.5 + $80 = $717.5 vs current market value $720. Very close — what assumptions change the math?"
• "Forbearance agreement mechanics: lender with $180M first lien has 90-day forbearance agreement while company pursues refinancing. Key terms: (1) company cannot incur additional debt; (2) company cannot pay dividends or management fees; (3) company must engage investment banker for sale process; (4) financial reporting quarterly (accelerated from annual); (5) any proceeds from asset sales applied to first lien reduction. What is lender's strategy if refinancing fails at day 90? Analyze: file UCC foreclosure on collateral vs push to Chapter 11 vs extend forbearance."

Chapter 11 Bankruptcy Analysis

• "Chapter 11 first-day motions: company filed Chapter 11 with $380M of debt, $28M of cash, and requires $15M/month to operate. Critical first-day motions needed: (1) DIP financing motion ($45M revolving DIP at LIBOR+650bps, priming lien on assets) — without DIP, company cannot pay employees or vendors; (2) critical vendor motion — pay $8.4M of pre-petition amounts to 3 critical vendors (sole source suppliers) who refuse to ship without payment; (3) cash management motion — maintain existing bank accounts (avoiding the requirement to move all funds to trustee account); (4) wages motion — pay pre-petition wages up to $15,150 per employee (507(a)(4) priority). Why does each motion require emergency approval?"
• "Plan of reorganization feasibility: proposed reorganized capital structure — new first lien $100M (replacing old $180M first lien, difference goes to equity), new equity 100% to first lien holders. Feasibility test: reorganized company must be able to pay its debts as they come due. New first lien $100M at 8.5% = $8.5M annual interest. Projected EBITDA $28M → interest coverage 3.3x. FCF ($28M − $8.4M capex − $8.5M interest − $5M mandatory amortization) = $6.1M → positive → feasible. Debt/EBITDA: $100M / $28M = 3.57x → sustainable."

363 Sale Analysis

• "363 asset sale analysis: company in Chapter 11 is selling its core business division via a 363 sale. Stalking horse bid: $140M from Strategic Buyer A (1.0x asset value). Bid procedures: minimum overbid increment $5M, auction in 60 days. Expected auction dynamics: 3 bidders qualified. Prior comparable 363 sales in the sector traded at 1.1-1.4x asset value. Estimated recovery for first lien creditors at stalking horse bid ($140M): $140M / $180M = 77.8%. At 1.3x asset value ($182M): $180M / $182M = 98.9% first lien recovery. Strategy for first lien creditor: support the auction process, do not consent to stalking horse break-up fee above 3% ($4.2M) to avoid discouraging higher bids."

Distressed Debt Trading

• "Distressed bond pricing: $120M of 8.5% Senior Unsecured Notes (2028 maturity) trading at 42 cents. Yield to maturity at 42 cents: solve for y in: $420 = $85/(1+y) + $85/(1+y)² + ... + $1,085/(1+y)^5 → YTM ~35.4%. Distressed yield (above 1000bps spread) confirms 'distressed' classification. Market-implied default probability (assuming 25% recovery): P(default) = (YTM − risk-free) / (YTM − risk-free + LGD) = (35.4% − 4.35%) / (35.4% − 4.35% + 75%) = 29.3%. At 42 cents with 25% recovery, what is the breakeven probability of recovery above par?"

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