What is a fulcrum security?

A fulcrum security is commonly understood as the most senior security in a capital structure that is not fully covered by the value of the collateral or assets available in the event of a liquidation. Essentially, it represents the point at which the distress or loss is factored in, making it the security that is likely to be converted into equity during a restructuring process. This means that holders of fulcrum securities are at risk of not being fully repaid but could gain ownership in the company if the situation worsens and equity is needed as part of a restructuring deal.

In this context, it is crucial to recognize that a fulcrum security plays a pivotal role in determining the potential recovery of other creditors and investors during times of financial distress, primarily because it is the last line of defense before equity holders are brought into the picture. This characteristic of offering a potential conversion into equity during challenging financial scenarios distinguishes fulcrum securities from other types of investments, which might not necessarily involve this level of risk or potential reward through conversion.

Understanding this definition clarifies why the option referring to the most senior security that is not fully paid back and may convert to equity aligns precisely with the established financial terminology surrounding distress situations and security classes.