Fulcrum security

In a restructuring, the most senior claim that will not be repaid in full and so is likely to receive the reorganised company's equity. Distressed investors buy it for influence over the outcome and the upside.

Where you will meet it

Fulcrum security appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain what defines distressed debt, the funding routes open to a troubled issuer, and the approaches investors take in distressed deals
  CFA Level III · Private Markets Pathway

  “The key step is the fulcrum security: the most senior class that enterprise value does not fully cover.”

• Set out the three standard ways a performance-based fee can be structured
  CFA Level III · Performance Measurement

  “The first form is symmetrical, sometimes called a fulcrum fee: the fee rises with outperformance and falls by the same proportion with underperformance around a base level, so manager and client share upside and downside alike.”

• Explain how special situations are investigated and valued before capital is committed
  CFA Level III · Private Markets Pathway

  “Seniors recover in full and juniors recover 100 ÷ 150 ≈ 66.7%, which makes the junior tranche the fulcrum.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with F · Glossary