Restructuring / Distressed M&A Questions & Answers

Pages 62-74

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

Restructuring bankers advised distressed companies – businesses going bankrupt, in the midst of bankruptcy, or getting out of bankruptcy – and 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.

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

Bankers can advise either the debtor (the company itself) or the creditors (anyone that has lent the company) money. It’s similar to sell-side vs. buy-side M&A – in one you’re advising the company trying to sell or get out of the mess it’s in, and in the other you’re advising buyers and lenders that are trying to take what they can from the company.

Note that the “creditors” are often multiple parties since it’s anyone who loaned the company money. There are also “operational advisors” that help with the actual turnaround.

You need to research which bank does what, but typically Blackstone and Lazard advise the debtor and Houlihan Lokey advises the creditors (these 3 are commonly as the top groups in the field).

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

You gain a very specialized skill set (and therefore become more valuable / employable) and much of the work is actually more technical / interesting than M&A, for example.

You also get broader exposure because you see both the bright sides and not-so-bright sides of companies.

If you’re coming in with any legal background or have aspirations of doing that in the future, there’s a ton of overlap with Restructuring because you have to operate within a legal framework and attorneys are involved at every step of the process – so that can be one of your selling points as well.

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

In addition to the legal and “better technical skills” angles, you can also use the experience to work at a Distressed Investments or Special Situations Fund, which most people outside Restructuring don’t have access to. Or you could just go back to M&A or normal investing too, and still have superior technical knowledge to other bankers. There’s no “wrong” answer as long as you don’t say you have no interest in it in the future.

How would a distressed company select its Restructuring bankers?

More so than M&A or IPO processes, Restructuring / Distressed M&A requires extremely specialized knowledge and relationships. There are only a few banks with good practices, and they are selected on the basis of their experience doing similar deals in the industry as well as their relationships with all the other parties that will be involved in the deal process.

Remember that a Restructuring involves many more parties than a normal M&A or financing deal does – there are lawyers, shareholders, debt investors, suppliers, directors, management, and crisis managers, and managing everyone can be like herding cats.

Lawyers can also be a major source of business, since they’re heavily involved with any type of Restructuring / Distressed scenario.

Why would company go bankrupt in the first place?

Here are a few of the more common ones:

• A company cannot meet its debt obligations / interest payments.

• Creditors can accelerate debt payments and force the company into bankruptcy.

• An acquisition has gone poorly or a company has just written down the value of its assets steeply and needs extra capital to stay afloat (see: investment banking industry).

• There is a liquidity crunch and the company cannot afford to pay its vendors or suppliers.

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

1. Refinance and obtain fresh debt / equity.

2. Sell the company (either as a whole or in pieces in an asset sale).

3. Restructure its financial obligations to lower interest payments / debt repayments, or issue debt with PIK interest to reduce the cash interest expense.

4. File for bankruptcy and use that opportunity to obtain additional financing, restructure its obligations, and be freed of onerous contracts.

What are the advantages and disadvantages of each option? FC 7

1. Refinance – Advantages: Least disruptive to company and would help revive confidence; Disadvantages: Difficult to attract investors to a company on the verge of going bankrupt.

2. Sale – Advantages: Shareholders could get some value and creditors would be less infuriated, knowing that funds are coming; Disadvantages: Unlikely to obtain a good valuation in a distressed sale, so company might sell for a fraction of its true worth

3. Restructuring – Advantages: Could resolve problems quickly without 3rd party involvement; Disadvantages: Lenders are often reluctant to increase their exposure to the company and management/lenders usually don’t see eye-to-eye

4. Bankruptcy – Advantages: Could be the best way to negotiate with lenders, reduce obligations, and get additional financing; Disadvantages: Significant business disruptions and lack of confidence from customers, and equity investors would likely lose all their money

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

These mirror the options that are available to the company itself in a distressed scenario:

1. Lend additional capital / grant equity to company.

2. Conditional financing – Only agree to invest if the company cuts expenses, stops losing money, and agrees to other terms and covenants.

3. Sale – Force the company to hire an investment bank to sell itself, or parts of itself.

4. Foreclosure – Bank seizes collateral and forces a bankruptcy filing.

How are Restructuring deals different from other types of transactions?

They are more complex, involve more parties, require more specialized/technical skills, and have to follow the Bankruptcy legal code – unlike most other types of deals bankers work on. The debtor advisor, for example, might have to work with creditors during a forbearance period and then work with lawyers to determine collateral recoveries for each tranche of debt.

Also, unlike most standard M&A deals the negotiation extends beyond two “sides” – it’s not just the creditors negotiating with the debtors, but also the different creditors negotiating with each other.

Distressed sales can happen very quickly if the company is on the brink of bankruptcy, but those are different from Bankruptcy scenarios.