CARSON'S CORNER / THE DEBT CRISIS

When marks meet reality

The Liquidation Stress Test

What happens to "senior secured" lenders when asset-light roll-ups are stressed and liquidated.

The short answer

"Senior secured" means little when the collateral is leased property with bolted-in equipment. Stress a sponsor's EBITDA and exit multiple even modestly and equity is wiped out; stress them like a real distress event and lenders recover a third of par. Recovery on enterprise value: car wash 10–25¢, software 15–35¢, dental 20–40¢. First-lien recovery fell from 76% (2022) to 39% (2024).

Car Wash

10–25¢
Don't own property; equipment bolted in.

Software / SaaS

15–35¢
No hard assets. Revenue evaporates.

Dental / DSO

20–40¢
Dentists can walk. Loyalty follows.

Try it: the recovery calculator

The default scenario uses a car wash — the poster child of PE roll-up excess (3,500+ new stores since 2020, sale-leasebacks that inflate EBITDA, zero per-site organic growth). Adjust the inputs to see the recovery waterfall.


Stressed enterprise value
$189M
Equity value
WIPED OUT
Lender recovery
68.7%

Illustrative model. Recovery = min(stressed EV, debt) ÷ debt. Equity = max(0, stressed EV − debt).

The recovery waterfall (worked example)

Sponsor case vs. stressed vs. real distress
MetricSponsor saysStressed (−30% / −40%)Real distress (−50% / −60%)
EBITDA$50M$35M$25M
Multiple9.0x5.4x3.6x
Enterprise value$450M$189M$90M
Debt$275M$275M$275M
Equity value$175MWIPED OUTWIPED OUT
LTV61.1%>100%>100%
Lender recovery68.7%32.7%

The page frames this against Ares' claim that private credit is "safer than IG bonds." First-lien recovery rates collapsed from 76% in 2022 to 39% in 2024. Covenant-lite deals jumped from 4% to 21% in two years; 50% of mega-deals over $500M lack financial maintenance covenants entirely.

Frequently asked questions

What is a liquidation stress test?

It applies a downside scenario to a sponsor's EBITDA and exit multiple, then runs the recovery waterfall to show how much lenders actually recover when marks meet reality.

How much do lenders recover when a PE roll-up fails?

For asset-light roll-ups: car wash 10–25¢, software 15–35¢, dental 20–40¢. First-lien recovery overall fell from 76% (2022) to 39% (2024).