The process of financial restructuring

Question 1

Name the triggering events for financial restructuring

Answer 1

• Event of Default: Payment default/ Breach of financial covenants/ other breach
• “Re-Fit”-financing: get better terms/ improve flexibility/ new funding, e.g. for expansion, M&A, dividends

Question 2

Name the different tactics regarding the triggering event.

Answer 2

• Event of Default: Proactive (Shareholder/company-led)/ Reactive (Lender-led)
• “Re-fit”: simply pay out existing lenders?

Question 3

What is usually the first step of the management?

Answer 3

Management (borrower) presents business plan based on current results

Question 4

What factors have to be assessed by all parties?

Answer 4

• earnings and cash profile
• upside potential/ downside risk
• plan achievability: conservative vs. aggressive
• enterprise value
• position relative to other providers of financing

Question 5

What is followed by the assessment of the business plan?

Answer 5

• negotiations

- followed by possible solutions regarding impacts and issues

Question 6

Earnings and cash profile: Solutions, impact, issues (Event of Default)

Answer 6

• solutions: lenders demand/ enforce payment
• impact: usually insolvency
• issues: value destruction

Question 7

Upside potential and downside risk: Solutions, impact, issues

Answer 7

• solutions: “fresh money” from shareholders and/ or lenders
• impact: from whom? what is fresh money used for?
• issues: risk vs. return of old vs. new cash

Question 8

Plan achievability: Solutions, impact, issues

Answer 8

• solutions: adjust repayments and interest terms
• impact: change cash profile
• issues: viable solution or lend and pretend?

Question 9

Enterprise Value : Solutions, impact, issues

Answer 9

• solutions: covenant reset
• impact: borrower pays bank fees
• issues: enterprise value

Question 10

Position relative to other providers of financing: Solutions, impact, issues

Answer 10

• solutions: full refinancing (all new parties)