Questions

Question 1

How much do you know about what you actually do in Restructuring?

Answer 1

Restructuring bankers advised distressed companies - business going bankrupt, in the midst of bankruptcy, or getting out of it, help them:
- change their capital structure to get out of bankruptcy
- avoid it in the first place
- or assist with a sale of the company depending on the scenario

Question 2

What are the 2 different sides of a restructuring deal? Do you know which one we usually advise?

Answer 2

Either the debtor (the company itself), or the creditors (anyone that has lent the company money)
- in one your advising the company trying to sell or get out of the mess it’s in
- in the other you’re advising buyers and lenders that are trying to take what they can from the company

Question 3

Why are you interested in restructuring besides the fact that it’s a hot area currently?

Answer 3

• Gain very specialised skill set, much of the work is more technical and interesting than MnA
• get broader exposure - see bright and dark sides of companies

Question 4

How are you going to use your experience in restructuring for your future career goals?

Answer 4

• legal and technical skills
• can also use the experience to work at a distressed investments or special situations fund
• or use strong technical knowledge for MnA or normal investing

Question 5

How would a distressed company select its restructuring bankers?

Answer 5

Requires high level knowledge and relationships
- banks are selected with the basis of their experience doing similar deals in the industry as well as their relationships with other parties involved in the deal process

Question 6

Why would company go bankrupt in the first place?

Answer 6

• cannot meet debt/ interest payments
• creditors can accelerate debt payments and force the company into bankruptcy
• acquisition has gone poorly, or company has written down value of its assets steeply and needs extra capital to stay afloat
• liquidity crunch and company can’t afford to pay back

Question 7

What options are available to a distressed company that can’t meet debt obligations?

Answer 7

• refinance
• sell the company, either as a whole, or in pieces in asset sale
• restructure its financial obligations to lower interest payments/ debt repayments, or issue debt with PIK interest to reduce cash interest expense
• file for bankruptcy and use that opp to obtain additional financing restructure its obligations and free from onerous contracts.

Question 8

What are the advantages and disadvantages of refinancing?

Answer 8

Adv:
- least disruptive to company and would help revive confidence
Disadv:
- difficult to attract investors to a company on the verge of going bankrupt

Question 9

What are the advantages and disadvantages of sale?

Answer 9

Adv:
- shareholders could get some value and creditors would be less infuriated, knowing that funds are coming
Disadv:
- unlikely to obtain a good valuation in a distressed sale, so a company might sell for a fraction of its true worth

Question 10

What are the advantages and disadvantages of restructuring?

Answer 10

Adv:
- could resolve problems quickly without 3rd party involvement
Disadv:
- lenders are often reluctant to increase their exposure to the company and management/lenders usually don’t see eye-to-eye.

Question 11

What are the advantages and disadvantages of bankruptcy?

Answer 11

Adv:
- could be the best way to negotiate with lenders, reduce obligations and get additional financing
Disadv:
- significant business disruptions and lack of confidence from customers, and equity investors would likely lose all their money.

Question 12

From the perspective of the creditors, what different strategies do they have available to recover their capital in a distressed situation?

Answer 12

• lend additional / grant equity to company
• conditional financing - only agree to invest if the company cuts expenses, stops losing money and agrees to other terms and covenants
• sale - force the company to hire an IB to sell itself, or parts of itself
• foreclosure - bank seizes collateral and forces a bankruptcy filling.

Question 13

How are restructuring deals different from other types of transactions?

Answer 13

• more complex
• involve more parties
• require more specialised/ technical skills
• have to follow the bankruptcy legal code
  Unlike most M&A deals the negotiation extends beyond two sides.

Question 14

Difference between chapter 7 and chapter 11 bankruptcy

Answer 14

C7 - also known as a ‘liquidation bankruptcy’, company is too far past the point of reorganisation, thus must instead sell off its assets and pay off creditors. A trustee ensures this all happens according to plan. Heart attack vibes
C11 - more of a reorganisation - company doesn’t die, but instead changes the terms on its debt and renegotiates everything to lower interest payments and the dollar value of debt repayments. Rehab vibes

Question 15

What is debtor-in-possession financing and how is it used with distressed companies?

Access from filing for C11 bankruptcy

Answer 15

It is money borrowed by the distressed company that has repayment priority over all other existing secured/unsecured debt, equity and other claims
- considered safe by lenders as it is subject to strict terms
- theoretically makes it easier for distressed companies to emerge from the bankruptcy process but some argue DIP lending firms try take over at a huge discount due to the collateral.

Question 16

How would you adjust the 3 financial statements for a distressed company when you’re doing valuation or modelling work?

Answer 16

• adjust COGS for higher vendor costs due to lack of supplier trust
• add back non-recurring fees associated with restructuring/distressed sale process
• add back excess lease expenses, due to lack of trust to OI
• working capital needs to be adjusted for receivables unlikely to receive, overvalued inventory and insufficient payables
• CapEx spending is often off, too high or low

Question 17

Would the adjustment to financial statements differ for public vs private company?

Answer 17

Most would apply to public too, but excess salaries does not hold true, much tougher for public companies to manipulate system and pay abnormal salaries.

Question 18

If the market value of a distressed company’s debt is greater than the company’s assets, what happens to its equity?

Answer 18

SE goes negative, but Equity Value remains positive

Question 19

What is the order of claims on a company’s assets?

Answer 19

1. DIP lenders
2. Secured creditors - revolvers and bank debt
3. Unsecured creditors - high yield bonds
4. Subordinated debt investors - similar to high-yield bonds
5. Mezzanine investors - convertibles, convertible preferred stock, preferred stock, PIK
6. Shareholders - equity investors

Question 20

How do you measure the cost of debt for a company if it is too distressed to issue additional debt, meaning investors wont buy any debt from them

Answer 20

Have to look at the yields of bonds or the spreads of credit default swaps of comp. Comps to get a sense of this

Can also use the current yields on a company’s existing debt to estimate this, though it may be difficult if the existing debt is illiquid.

Question 21

How would valuation change for a distressed company?

Answer 21

• use same methodologies most of the time
• look at the lower range of multiples, make aforementioned accounting adjustments
• use lower projections for a DCF and anything else that needs projection because you assume a turnaround period is required
• you might pay more attention to revenue multiples if company is EBIT/EPS negative
• look at liquidation valuation too

Question 22

Let’s say a distressed company approaches you and wants to hire your bank to sell it in a distressed sale - how would the M&A process be different than it would be for a healthy company?

Answer 22

1. Timing is often quick, as if not sell - bankrupt
2. Sometimes you’ll produce fewer upfront marketing materials, in the interest of speed
3. Creditors often initiate the process rather than the company itself
4. Unlike normal M&A deals, distressed sales can’t fail - result in a sale, bankruptcy or sometimes a restructuring

Question 23

Normally in a sell-side M&A process, you always want to have multiple bidders to increase competition. Is there any reason they’d be especially important in a distressed sale?

Answer 23

Yes - in a distressed sale, you have almost no negotiating leverage because you represent a company that’s about to die, only real way to improve price for your client is to have multiple bidders

Question 24

The 2 basic ways you can buy a company are through a stock purchase and an asset purchase. What’s the difference, and what would a buyer in a distressed sale prefer? What about the seller?

Answer 24

Stock purchase = acquire 100% of shares and all assets and liabilities
Asset purchase = only acquire certain assets and certain liabilities
- companies use asset purchases for divestitures, distressed M&A and smaller private companies
- anything larger needs to be acquired via stock purchase
- buyer almost always prefers an asset purchase
- seller almost always prefers stock purchase, rids all liabilities and taxed less.