Workout three asks us to use the information from the previous two workouts and calculate the expected recovery in absolute and percentage terms of the fulcrum security holder under both the senior and unsecured creditors' view of enterprise value.

Starting with the senior creditors' view of enterprise value to work out what the unsecured creditors would get because remember, we identified them as being the fulcrum security. We need to start with the enterprise value, which according to the senior creditors, enterprise value is 75, and we're going to subtract net debt at the senior level. So we're going to subtract 80, which is what we owe the senior secured debt holders minus the 10 cash and cash equivalents, and that leaves 5 to be paid out to the unsecured creditors. Another way of thinking about this is that enterprise value of 75 does not include the cash and cash equivalence.

When we add on the cash and cash equivalence of 10, we have 85. We then pay 80 out to the secured creditors and we are left with 5 for the unsecured creditors.

In percentage terms, their recovery rate would be five out of the 120 that they are owed, leaving a low recovery rate of 4% recovery based on the unsecured creditors' view of enterprise value would be better because the unsecured creditors' view of enterprise value was higher. So the only thing different in this calculation is that instead of starting with an enterprise value of 75, we starting with an enterprise value of 125, and then we subtract net debt at the senior level, so the 80 minus 10, leaving 55 for the unsecured creditors, and as a percentage of the 120 that is owed to them, that is a much better recovery rate of 46%.

So we can see that under either view of enterprise value, the unsecured predators do not get repaid in full, and that is why the unsecured debt is the fulcrum security.