HL Restructuring Case Study Flashcards
Leverage ratio of 5 and coverage ratio of 5. What is the interest rate?
leverage ratio = Debt / EBITDA. Coverage ratio = EBITDA / interest expense. Interest expense = interest rate * debt. Isolate interest rate.
If we have EBITDA = $40m, EV/EBITDA = 5x, senior secured debt of $150m, and unsecured debt of $100m, then what is the value of equity and the value of debt if a chapter 11 is imminent? Where would the unsecured debt trade?
EV is 200m, covering secured debt, and provides 50% recovery on the uncured class of debt. This means the unsecured debt will be the impaired class in the eventual chapter 11, and are therefore the class who can vote on a plan of reorganisation (POR) and will ge the reorganised equity. Therefore, would expect debt to trade slightly higher than 50, reflective that the unsecured debt would transform to equity under POR, and therefore would have a call option like payoff that comes with the equity.
What aspects of restructuring appeals to you?
- Breadth of deals; no coverage groups like most investment banks
- Unique nature of restructuring deals as each company will have very different balance sheet and situation that led them to distress. Very intellectually stimylating
- Combination of finance, law and psychology
- Lean deal teams, good experience early on.
What are springers in capital structure stuff?
Short for springing maturities, which is to say if XYZ loan hasn’t been re-financed by this date, then another loan spring ` months before XYZ.
In other words, if by. a certain date a loan or bond lower in the capital structure has not been mostly or completely re-financed, then some loan or bond higher in the capital structure will have its maturity date spring forward
This is done to ensure that a situation doesn’t arise where some junior piece of the capital structure gets paid out, using up all or most of the liquidity of the company, leaving less for the more senior piece of the capital structure when they come due.
What are characteristics of distressed company?
constant negative FCF, declining EBITDA, equity trading down.
Limited liquidity which means they will have limited runway for continued operations assuming current and continuing negative FCF.
Maturity walls approaching with the company perhaps not believing they can refinance the debt that is coming due.
How do we think about capitalising vs expensing things? Anything to be mindful of in the context of restructuring?
Capitalise when their useful life is over a year and then depreciate over relevant period. In distressed situations, care a lot about capital leases, because they are considered debt and are often added (if they’re large) to cap tables.
What happens if you have an asset write-down of $100?
Asset write downs affect the income statement since losses operate as a tax shield. So, on the income statement, it is down $100 pre-tax and after tax it is down $60. On cash flow from operations, net income starts. down $60, but an asset write-down is non-cash, so we add back $100 meaning CFO is up $40.. Nothing else changes.
Up $40 translates through to $40 higher Cash & equivalent, but PPE is down by $100 so assets down by $60. This is balanced by retained earnings being down by $60 because of net income.
So if a company files for chapter 11 and then must come up with a POR. What’s that include?
Five mandatory provisions for a plan of reorganisation.
1) Plan must designate classes of claims and classes of interest (e.g must provide a detailed cap table)
2) Plan must specify any class of claims or interest that are not impaired under the plan (e.g classes the have full asset coverage thus will not be able to vote or are otherwise not deemed impaired)
3) Plan must specify the treatment of any class of claims or interest that are impaired under the plan (e.g what are you offering them in the re-organised company upon emergence from bankruptcy since they are impaired)
4) Plan must provide the same treatment for each claim or interest of a particular class unless requisite vote holders agree to less favourable terms
5) Plan must provide the adequate means for the implementation of the plan (meaning, the plan must be feasible and achievable).
What are the two-sides of a restructuring? Who do Gleacher advise?
Debtor and creditor sides.
Debtor deals with the comapany. Creditors deal with a large number of bond or loan holders within a certain class who band together.
A bond has current price of 80,, 10% coupon, and matures next year>. What’s the YTM? Will the YTM be higher if it matures in 2 years?
xxx
What is a cram down?
Process by which a POR is imposed on an impaired class that has voted to reject the plan. This can be done by the court if at least one impaired class votes for the POR.
Cram downs are done to avoid having one block of votes stop a company getting out of chapter 11.
What is refinancing of debt?
Replacement of existing debt with new debt that has more favourable conditions, maybe a lower interest rate or a longer time for it to be due.
What is a revolver facility?
Line of credit offered to businesses that allow them to repay the loans in small increments and not at a predefined intervals. Usually has a limit on it.
If a company is in finnaicial distress, what are their options?
Refinancing of debt, Selling the company, Consensual financial restructuring, File chapter 11
What options are there for a consensual financial restructuring?
Priming Lien, use of cash collateral, cram-down
