IB prep Flashcards
Why Jeffries?
Jeffries obviously has the global reputation and reach and reputation of a bulge bracket which is extremely appealing but also as an independent has a boutique feel and flexibility, so you get best in class training, leadership and working with the most talented people which as someone in the early stages of my career with lots of learning to do is huge , you get to work on the most exciting and complex deals but then also have more variety across and sectors an regions and also have a more close knit team with more interaction with seniors, which I like coming from smaller close team myself. Then also speaking to Ed, obviously spoke really high of Jeffries and the how much he enjoyed the work that he’s doing.
The work on thames caught my eye when doing my research, a very interesting and complex engagement especially with things like utilites and essential services that affect everyone they are much more polarising and publicised than other deals, I know he advisor fees and the interest rates on the restructured debt was a particular point for the public, might have been raised my MPs as well.
Why restructuring and debt advisory?
Yea so for me the motivation or what draws me to a job like this is that has the dynamic and intellectually stimulating environment of Investment banking, the opportunity to solve complex problems while working on high stakes transformative transaction is very exciting.
- Sister lawyer
- Work on move, enjoyed high stakes nature, extremely fast paced always changing, felt like you were really making a difference/adding value
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Key projects KPMG
Jade, NZRC, Move further, Orion, NZFL
- What is the difference between senior debt and subordinated debt?
a. Senior debt is repaid first in case of bankruptcy or liquidation, while subordinated debt is lower in priority and paid only after senior debt is settled. Senior debt generally has lower risk and interest rates, while subordinated debt has higher risk and typically higher returns
- Can you explain the concept of a debt covenant and give examples of common types?
a. Debt covenants are conditions placed by lenders on the borrower to protect the lender’s interests. There are two main types: affirmative covenants (require the borrower to take certain actions) and negative covenants (restrict the borrower from taking certain actions). Common examples include debt-to-equity ratio limits, interest coverage ratios, and restrictions on asset sales. If breached may result in fines, higher rates or additional collateral requirements.
- What is the purpose of a rescue financing or debtor-in-possession (DIP) financing in a distressed situation?
a. It is a special form of financing provided to companies in bankruptcy or distress, allowing them to continue operating while restructuring. It is typically senior to existing debt and helps fund operations and restructuring efforts.
- How do you assess the financial health of a distressed company?
a. Key metrics used to assess a distressed company include liquidity ratios (like current and quick ratios (same but no inventory)), solvency ratios (debt-to-equity, interest coverage), cash flow analysis, and profitability. Also, examining working capital, asset valuations, and the ability to service existing debt are critical in assessing financial distress.
- What is the role of a turnaround plan in the restructuring process?
a. A turnaround plan outlines how a distressed company can return to financial health. It often involves reducing costs, divesting non-core assets, renegotiating debt, and increasing operational efficiencies. It is a key component for gaining creditor support and ensuring the viability of the company post-restructuring.
- What are the common restructuring tools used to manage distressed debt?
a. Debt-for-equity swaps: Lenders convert part of the debt into equity.
b. Debt rescheduling or forbearance: Extending the maturity of debt or temporarily suspending payments.
c. Asset sales: Selling non-core assets to raise cash.
d. Debt buybacks: The company repurchases its debt at a discount.
- What is a “distressed M&A” transaction, and how does it differ from a regular M&A transaction?
a. Refers to mergers or acquisitions involving companies in financial distress. These transactions are often driven by the need to sell off assets or a whole business quickly, which can lead to discounts on the sale price. Distressed M&A differs from regular M&A because it involves time pressure, lower valuation, and potential complications with creditor approvals.
- How do you handle creditor negotiations during a restructuring?
Creditor negotiations involve balancing the interests of various creditors, which may include senior and subordinated debt holders. Strategies include offering debt-for-equity swaps, extending maturities, or finding new financing to support the company. The goal is to reach a deal that allows the company to continue operating while satisfying creditor demands to the greatest extent possible.
What are the five key considerations in distressed valautions?
- Financial Health: Assess the company’s liquidity position, debt covenants, and cash flow. Distressed companies may not have positive cash flows, which makes forecasting challenging.
- Restructuring Plans: If the company is undergoing a restructuring or has announced a bankruptcy, understanding the terms of the restructuring (e.g., debt-for-equity swaps, creditor concessions) will be critical to estimating future value.
- Control Premium or Discount: The ability of a distressed company to successfully restructure or recover may depend on who controls the company post-reorganization (e.g., existing shareholders vs. new investors). A control premium (or discount) may be applied depending on the potential for influence over the company’s future.
- Industry and Market Conditions: The broader economic environment, industry-specific conditions, and regulatory environment will play a significant role in determining the likelihood of recovery for a distressed company.
- Management and Operational Turnaround: The ability of the management team to turn the company around should be assessed, as this could significantly impact future cash flows.
Thames key problems and current situation?
Unsustainable debt levels, regulatory restrictions on pricing, water infrastructure requiring significant maintenance and upgrades, number of sewage leaks and pollutions, increased focus on meeting environmental targets, poor planning by management, all of above lead to higher cost of capital.
Jeffries has stepped in to help secure emergency funding, look for potential investors, help restructure and refinance its debt. Trying to avoid Govt taking, over as public trust in govt run entities, having to align with govt agendas could slow turn around, less atractive for invstor.
What is done if value does not clear debt?
– If sale value does not clear debt then some creditors remain unpaid or not paid in fall this is credit shortfall. Creditors are repaid based on seniority
- Debt forgiveness or restructuring may occur especially if lender will recover little in a liquidation process, may take haircuts or reduced principal payments.
- Sale under pre-packaged bankruptcy, creditors negotiate restructuring before bankruptcy begins, sale proceeds then pay down bets and rest is restructured, can be a quicker process.
- Debt for equity swap, creditors agree to convert their debt to equity
- Acquisition of assets only or specific assets
- Credit bid, in bankruptcy creditors may use outstanding bid to acquire company and its assets, can then take ownership of the company instead of going through litigation.
- If all debt cannot be cleared through sale and no agreement between creditors then company will be forced into liquidation
What is the difference between senior debt, subordinated debt, and equity?
Senior Debt: This is the highest-ranking debt in the capital structure, meaning it gets paid first in the event of liquidation. It typically carries the lowest interest rates due to its lower risk.
Subordinated Debt: Also called junior debt, it ranks below senior debt but above equity. It carries higher interest rates due to the higher risk of repayment.
Equity: Equity holders (common shareholders) have the lowest claim on assets. They are paid last in case of liquidation but have the potential for higher returns in the form of capital appreciation and dividends.
Can you explain the capital structure of a distressed company?
A distressed company typically has a high proportion of debt relative to equity, which is unsustainable and may be leading to cash flow problems. The capital structure may include senior debt, subordinated debt, and equity, with the company potentially having covenant breaches or being close to insolvency. In restructuring, creditors may agree to renegotiate debt terms, convert debt to equity, or sell assets to reduce liabilities.
How do you calculate a company’s debt-to-equity ratio, and what does it tell you about the company’s financial risk? What would over / under leveraged be?
Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity. This ratio shows the proportion of debt a company is using to finance its operations relative to its equity. A higher ratio suggests greater financial leverage, which increases financial risk, especially if the company faces cash flow issues.
A company is considered over-leveraged if its debt load is too high relative to its ability to service that debt (i.e., high debt-to-equity ratio or low interest coverage ratio). Conversely, it is under-leveraged if it has too little debt, potentially missing opportunities to use cheaper debt financing to fund growth.
Walk me through the different approaches you would use to value a distressed company
Discounted Cash Flow (DCF): Projecting future free cash flows and discounting them back to present value using a higher discount rate to account for risk and uncertainty. and reduced TV. Using FCFE (must use COE for WACC) also might be an option if wanting to model out restructured debt or equity swaps.
Comparable Company Analysis: Valuing the distressed company based on the multiples of similar public companies, such as EV/EBITDA or P/E ratios, adjusted for the distressed nature, lowered.
Precedent Transactions: Analyzing recent M&A transactions in the same or similar industries to determine what multiples were paid for distressed companies, control premium also must be thought about.
Asset-Based Valuation: Values the company based on the liquidation value of its assets less its liabilities, usually at reduced value due to the need for liquidity, or in a fire scenario.
How do you adjust valuation assumptions when modeling a distressed company
You would typically increase the discount rate to reflect the higher risk, lower the growth rate assumptions, and adjust for the possibility of impaired assets or future liabilities (e.g., contingent liabilities). Also, more conservative assumptions on working capital and capital expenditures may be necessary.
What are some of the key adjustments you might make to a company’s financials in a distressed situation?
Adjust for impairments of assets (e.g., goodwill, intangibles), revenue write-offs, or changes in working capital (e.g., liquidity constraints may lead to delayed payments or tighter credit terms). You may also have to model restructured debt terms (lower interest rates or longer repayment periods) and account for any potential debt forgiveness or debt-for-equity swaps.
Explain how you would model the impact of debt restructuring on a company’s balance sheet.
You would reflect new debt terms (lower interest rates or extended maturities), reduced debt (through debt forgiveness or debt-for-equity swap), and changes in equity if creditors convert debt into equity. This would impact the company’s leverage ratio, interest expense, and overall equity base.
What is a debt-for-equity swap, and how does it work in a restructuring scenario?
A debt-for-equity swap involves creditors exchanging a portion or all of the company’s debt for equity in the company. This reduces the debt burden and gives creditors a stake in the company’s future success. In a restructuring, this allows the company to reduce its liabilities while creditors potentially benefit from the company’s recovery.
Can you explain the difference between a “pre-packaged bankruptcy” and a “pre-arranged bankruptcy”?
Pre-Packaged Bankruptcy: A restructuring plan is agreed upon with creditors before filing for bankruptcy, and the company enters bankruptcy with the plan already in place. This typically leads to a quicker and more efficient process.
Pre-Arranged Bankruptcy: Similar to pre-packaged, but the plan is finalized after the bankruptcy filing. This process may take longer and involve more negotiations.
In a distressed sale, if the sale proceeds don’t cover the debt, what are the potential outcomes for creditors and shareholders
Creditors may suffer haircuts (reduced repayment amounts), potentially agreeing to debt-for-equity swaps or other compromises to facilitate the sale. Shareholders are often wiped out, as creditors have senior claims on proceeds. A liquidation scenario could also arise, where creditors receive a portion of the sale proceeds, with common shareholders receiving nothing.
What are some common restructuring techniques (e.g., debt forgiveness, asset sales, debt refinancing)?
Debt Forgiveness: Creditors agree to cancel part of the debt to help the company survive.
Asset Sales: Non-core assets are sold to raise cash and reduce liabilities.
Debt Refinancing: The company negotiates new debt terms, such as extended maturities or lower interest rates, to ease financial pressure.
How do you assess whether a distressed company should undergo a formal bankruptcy process versus an out-of-court restructuring?
If the company has significant operational issues or creditor conflicts that make negotiation difficult, formal bankruptcy may be necessary. If the company’s creditors are willing to cooperate and there is a clear path to recovery, an out-of-court restructuring can be quicker and less costly.
What are financial covenants, and why are they important in debt agreements?
Financial covenants are conditions that the borrower must meet to stay in compliance with the loan agreement. They often include limits on leverage (debt ratios) or liquidity (cash flow or working capital levels). They protect lenders from excessive risk and can trigger defaults if violated.
Explain what happens if a company breaches a covenant in its debt agreement
If a company breaches a financial covenant, the lender may call the loan, demand immediate repayment, or renegotiate terms. In distressed situations, a waiver or covenant reset may be negotiated to allow the company to continue operations.
Can you explain the difference between an “affirmative” and a “negative” covenant in a debt agreement
Affirmative Covenants: These are obligations that require the borrower to take specific actions, like maintaining insurance or submitting financial statements.
Negative Covenants: These restrict the borrower from taking certain actions, such as incurring additional debt, selling assets, or paying excessive dividends.
What is a “cross-default” provision, and how does it affect the restructuring process?
A cross-default provision means that if a company defaults on one debt agreement, it triggers defaults across other debt agreements. This can complicate restructuring as it affects multiple creditors simultaneously.
How would you assess the financial health of a distressed company?
You would assess key metrics like liquidity ratios (e.g., current ratio, quick ratio), solvency ratios (e.g., debt-to-equity, interest coverage), and cash flow to determine if the company can meet its short-term obligations. Additionally, a detailed trend analysis of revenues, margins, and cash flow would provide insights into operational weaknesses
What are the key metrics you would analyze when evaluating a distressed company’s ability to repay its debts?
Interest Coverage Ratio: Measures the company’s ability to meet its interest payments.
Free Cash Flow: Assesses the company’s ability to generate cash after operating expenses and capital expenditures.
Leverage Ratios: Provides insight into the company’s debt burden, such as debt-to-equity or debt-to-EBITDA ratios.
Explain the role of working capital in a distressed company. How does it impact liquidity during restructuring?
Working capital (current assets - current liabilities) is a key indicator of liquidity. In distressed situations, managing working capital effectively (e.g., reducing inventory, improving receivables collection) is critical for maintaining operational flexibility and supporting cash flow during restructuring.
What are the risks involved in a distressed debt investment, and how would you mitigate them?
Risks include liquidity risk, covenant breaches, and operational failure. These can be mitigated by conducting thorough due diligence, ensuring a well-structured restructuring plan, and negotiating debt-for-equity swaps or other mechanisms that improve the company’s equity position
Debt priority ranking
Trading multiples vs DCF vs transaction multiples in terms of pros and cons
- Trading Multiples (Comparable Companies Analysis):
What it is: Valuation based on market multiples of similar publicly traded companies (e.g., EV/EBITDA, P/E).
Pros: Quick, market-based, and easy to apply.
Cons: May be influenced by market distortions, lacks company-specific insights. - Transaction Multiples (Precedent Transaction Analysis):
What it is: Valuation based on multiples from past M&A transactions of similar companies.
Pros: Reflects actual deal prices and strategic premiums.
Cons: Limited by historical data, may not reflect current market conditions. - Discounted Cash Flow (DCF):
What it is: Values a company based on its projected future cash flows, discounted to the present using a required rate of return.
Pros: Focuses on intrinsic value and long-term cash generation.
Cons: Sensitive to assumptions about future performance and difficult to estimate accurately.
Key Differences:
Trading and transaction multiples are market-based and easier to apply but don’t capture long-term potential.
DCF provides a deeper, intrinsic valuation but requires accurate future forecasts and is sensitive to assumptions.
When to use each method?
Trading Multiples: Best for a quick, market-based valuation of a company or for companies with public peers in similar industries.
Transaction Multiples: Ideal when assessing the value of a company in the context of potential M&A transactions, especially if there are premium considerations or synergies., as trading multiples do not reflect these
DCF: Most useful for understanding the intrinsic value of a company based on its own future potential, especially for companies with stable cash flows or long-term growth projections.
