Introduction to Corporate Restructuring

Question 1

What are the four main stages of company crisis incubation?

Answer 1

1. Inefficiency
2. Bad management
3. Losses emerge, equity capital is eroded
4. Insolvency
   Bottom line: cash needed to pay debts is dried up

Question 2

Why do companies fail?

Answer 2

1. Inefficiency
2. Excess capacity
3. Product/service obsolescence
4. Lack of long term planning or inovation
5. Financial crisis

Question 3

What is the restrucuting matrix?

Answer 3

The restructuring matrix is a way to determine the specific restructuring process:
If the goal is to keep the firm afloat and the process is in the court: in the court restructuring
If the goal is to keep the firm afloat and the process is out of the court: out of the court restructuring
If the goal is to liquidate and cease the company and the process is in the court: Insolvency procedures
If the goal is to liquidate and cease the company and the process is out of the court: Voluntary Liquidation

Question 4

How is the choice of the specific restructuring/liquidation process within the restructuring matrix done?

Answer 4

Focus on direct and indirect costs of the crisis:
1. Direct costs: cost of the procedure vs fees of the advisors, sacrifice of creditors’ and shareholders’ rights
2. Indirect costs: reputation, destruction of intangible assets, lost opportunities, time required for the approval of restructuring plan

Question 5

What is the chapter 7 of the us corporate law concerning restructuring?

Answer 5

Liquidation procedure designed to allow defaulted debtors (natural persons or proprietorships) to separate personal assets from corporate assets and use only the latter to pay creditors

Question 6

What is the chapter 13 of the us corporate law concerning restructuring?

Answer 6

Liquidation procedure that allows the firm to pay creditors by installments, in full or partially, in a period from 3 to 5 years.

Question 7

What is the chapter 11 of the us corporate law concerning restructuring?

Answer 7

• A procedure that allows the firm to continue its operations during the preparation of a restructuring plan for the repayment of its creditors. During the preparation no creditor can require the payment of the firm’s obligations (“standstill clause”)
• The plan must be approved by the Court and must be prepared within 120 days from the filing
• If approved, the debtor can repay part of the debts and cancel some others (burdensome contracts)
• Approval is required by the majority of each category of creditors, but cramdown is possible if in the bet interest of all creditors (if mandated by the judge

Question 8

What are the pros and cons of in-the-court liquidation procedures?

Answer 8

Pros:
* Procedure is controlled by the court (a guarantee of creditors’ right protection)
* Easier to estimate the recovery rate (low)
* The loss is frequently tax deductible
Cons:
* Length of the procedure
* Recovery ratio is very low
* Intangible assets are lost (if firm is liquidated)
* High social costs (if firm is liquidated)

Question 9

Who is usually the party leading restructuruing?

Answer 9

Depends:
1. For Large company with a few big creidtors it is a cooperation betwen the advisor and the main bank
2. For small/medium companies with few big creditors it is the main bank taking the leading role
3. For large banks with many small creditors it is the advisor taking the lead role

Question 10

What do financial advisors do in restructuring?

Answer 10

1. Credit Analysis and Debt Capacity Assessment
2. Valuation (recovery analysis/M&A options)
3. Relationship with different stakeholders
4. Due diligence coordination
5. Documentation drafting coordination
6. Negotioations of terms & conditions of the restructuring agreement
7. Fund raising

Question 11

What are some general characteristics fo the restructuring plan of a financial advisor?

Answer 11

1. Very frequently a financial plan
2. Industrial restructuring is studied by consultants other than the financial advisor
3. It can propose to creditors one single option or multiple options
4. It indicates the management that will lead the restructuring phase (often selected by the advisor with the creditors’ approval)

Question 12

What is the recovery ratio?

Answer 12

The crucial variable for creditors in the restructuring plan
Recovery ratio is the ratio between the value of the assets and value of existing liabilities
If equity is negative RR is less than 100%

Question 13

Who has the say in the restructuring/liquidation?

Answer 13

The final say lies with the creditors, all of which must give their consent to restructuring. There is a bit of a conflict between subordinated creditors and senior creditors depending on the recovery ratio. If subordinated creditors are not getting anything, they are much more likely to support restructuring, as at least then their recovery is potentially more than 0. Senior debt, however, can just get its moeny from the liquidation, and their decision largely depends on the recovery ratio.

Question 14

What is debt sustainability?

Answer 14

Debt sustainability is a way to evaluate the soundness of the firm.
Base methodology DSCR (debt service cover ratio): Unelevered free cash flow/debt service (principal + interest payment)
Sustainable DSCR is between 1.0x and 1.2x

Question 15

What are the two methods for restructuring (incearsing equity)?

Answer 15

1. Equity injections (need more cash, unpopular)
2. Debt-to-equity swap (purely accounting)