Questions Part 2 Flashcards
Sometimes a distressed sale does not end in a conventional stock/asset purchase – what are some other possible outcomes?
- foreclosure
- general assignment
- section 363 asset sale
- c11 bankruptcy
- c7 bankruptcy
Normally M&A processes are kept confidential – is there any reason why a distressed company would want to announce the involvement of a banker in a sale process?
This happens even outside distressed sales – generally the company does it if they want more bids / want to increase competition and drive a higher purchase price.
Are shareholders likely to receive any compensation in a distressed sale or bankruptcy?
Mostly no
- if truly distressed, value of its debt and obligation most likely exceed the value of its assets - so equity investors rarely get much out of a bankruptcy or distressed sale - especially when it ends in a liquidation.
Let’s say a company wants to sell itself or simply restructure its obligations – why might it be forced into a Chapter 11 bankruptcy?
Aggressive creditors can force this to happen - if they won’t agree to the restructuring of its obligations or they can’t finalise a sale outside court, may force a company into C11 by accelerating debt payments
Recently, there has been news of distressed companies like GM “buying back” their debt for 50 cents on the dollar. What’s the motivation for doing this and how does it work accounting-wise?
Use excess BS cash to buy back debt on-the-cheap and reduce interest expense and obligations going forward.
- works as foregone interest on cash is lower than whatever IR paying on debt, so reduce net interest expense regardless.
What kind of companies would most likely enact debt buy-backs?
Likely over-levered companies - one with too much debt - which were acquired by PE firms in leveraged buyouts during the boom years, and now face interest payments they have trouble meeting, along with excess cash.
Why might a creditor might have to take a loss on the debt it loaned to a distressed company?
Happens to lower-priority creditors all the time.
- secured creditors come first and get claim to all the proceeds form a sale or series of asset sales.
- if a creditor is lower on the totem pole, only get what’s left of the proceeds so they have to take a loss on their loans/ obligations.
What is the end goal of a given financial restructuring?
A restructuring doesn’t change the amount of debt outstanding in of itself, instead changes the terms of the debt - like interest payments, quarterly principal repayment requirements and covenants.
What’s the difference between a Distressed M&A deal and a Restructuring deal?
Restructuring is one possible outcome of a distressed M&A deal.
- company can be distressed for many reasons, but solution is not always to restructure its debt obligations - may declare bankruptcy, might liquidate and sell off its assets, or it might sell 100% of itself to another company
- restructuring just refers to what happens when the distressed company decides it wants to change around its debt obligations so it can better repay them.
What’s the difference between acquiring just the assets of a company and acquiring it on a “current liabilities assumed” basis?
When you acquire the assets of a distressed company, literally only get the assets.
- but when acquire current liabilities as well, need to make adjustments to account for the fact that a distressed comps working capital can be extremely skewed.
- owed expense lines like AP, AE often much higher, so need to sub the difference if assuming the current liabilities
- results in a deduction to valuation
How could a decline in a company’s share price cause it to go bankrupt?
Market share does not = SE
- as a result of share price drop, customers, vendors, suppliers and lenders would be more reluctant to do business with the distressed company
- so revenue may fall, AP and AE may rise badly
- all of that may cause comp to fail or require more capital, but share price decline itself does not lead to bankruptcy
E.g. bear sterns in 2008, overnight lenders lost confidence as a result of the sudden share price declines and completely ran out of liquidity as a result - huge issue for business who are dependent on overnight lending.
What happens to Accounts Payable Days with a distressed company?
Rise, and average AP days might go well beyond what’s normal in the industry
Let’s say a distressed company wants to raise debt or equity to fix its financial problems rather than selling or declaring bankruptcy. Why might it not be able to do this?
Debt: if comp too small, or investors dont believe it has credible turnaround plan, will simply refuse to lend
Equity: equity investors have EVEN lower priority than debt investors, so even less likely to lend
Will the adjusted EBITDA of a distressed company be higher or lower than the value you would get from its financial statements?
Most cases will be higher as you’re adjusting for higher than normal salaries, one time legal and restructuring charges, etc
Would you use Levered Cash Flow for a distressed company in a DCF since it might be encumbered with debt?
No, especially in distressed, as it’s really important to analyse cash flows on a debt-free basis precisely because they might have higher-than-normal debt expenses
