Restructuring interview: 1st analyst
(Senior Baboon, 222
Points)
on 1/11/10 at 6:35pm
anyone has done this before ? Would be really helpful if someone could share what they have been through, what type of questions and such and such. Thank you very much!
anyone
anyone
Probably the best primer for
Probably the best primer for restructuring... should definitely give this a read.
http://www.hl.com/library/bsttcacs.pdf
Since you're a 1st year
Since you're a 1st year candidate they probably wont have much expectations of your restructuring knowledge, but you can demonstrate an inclination towards restructuring if you exhibit superior knowledge for a college student.
A few things you could look into:
#1- Chapter 11 vs. Chapter 7
#2- What makes a company file bankruptcy?
#3- What is DIP financing?
#4- How does a company actually restructure in a Chp. 11 process (in very general terms); possible DIP financing, reach agreement with creditors, renegotiate contracts, divest select assets
#5- Know the waterfall of capital structure
#6- What is the role of a trustee? CRO (chief restructuring officer)?
In one of my interviews, my interviewer rattled off a bunch of pieces of a make believe company's capital structure and asked what the value of a certain tranche of debt was. I didn't know it, but walked him through how I would try to figure it out. He said it was close and he really didn't think I had a shot in hell at actually knowing it but wanted to see if I could think it through in concept. So take that for what its worth.
Know your typical investment banking technicals... why do we use EBITDA? How do you calculate FCF? How do you value a company? etc...
PM me if you need more info on any of the questions I mentioned above.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
Chocolate Bear
Probably the best primer for restructuring... should definitely give this a read.
http://www.hl.com/library/bsttcacs.pdf
I just browsed this and agree it would give you a huge advantage if you read and absorb this.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
i already read that
i already read that thread...pretty interesting read..thank you all!
Figured I might as well post
Figured I might as well post this PM for any other interested parties as well.
I actually have no idea of what the capital structure is. Could you please help me on that
capital structure is generally as follows, in order of seniority:
Debt
- Senior Secured
- Senior Unsecured
- Junior Unsecured
Equity
- Preferred Shares
- Common Shares
So a company has to pay its creditors before it pays equity holders. When a company goes into bankruptcy, for simplicity purposes lets assume its a Chapter 7 (dissolution/liquidation)... you’re essentially taking the company’s assets, selling them and using the proceeds to pay your creditors. Insolvency(aka being bankrupt) by definition is when liabilities exceed assets (its technically more complicated and specifically defined than this, but lets run with this for now). This inherently implies that there are less assets to sell than there are creditors $’s to pay. The way the waterfall works is that the most senior level of the capital structure is typically paid first / repaid at the best recoveries (i.e. closest to par, which doesn’t mean it is at all close to par, but relatively closer than the other sorry bastards who will get paid after you)… in the example above, because Senior Secured creditors claims are secured by assets, the sale of the assets will repay their claims. Once these assets are gone, NOW the next set of creditors / stakeholders are in line to get some money from the debtor(i.e. bankrupt company). Now think about it, if there are assets that no one wanted to secure as collateral, most likely that’s for a very good reason… because they’re probably not very good at holding their value or liquid to sell. So these scraps are left to be sold for remaining claims. Its upto the judge presiding over the bankruptcy to determine what is fair to pay each of the respective parties issuing claims.
So the above capital structure, from top to bottom, is the waterfall associated with the example company. Typically lenders have clauses in the credit agreements that state that the loan is collateralized by X assets in addition to, in case of default, the equity of such company. That’s how the “loan-to-own” strategy is implemented. In addition to that, if you’re a large enough creditor, the bankruptcy judge and trustee will essentially listen to whatever you say since any other interests in the debtor are negligible and you're the primary creditor (to a certain extent). This waterfall situation is also why a public company’s stock falls to near $0.00 / share when it files. Because once everyone is paid, there really wont be anything left to give equity holders since Assets < Liabilities, when all the assets are sold and proceeds are paid to the creditors, there’s nothing else to liquidate to give to shareholders.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
great post! Could you discuss
great post!
Could you discuss mezz loans in the waterfall?
But if all the assets,
But if all the assets, especially in terms of quality, are being sold, why would you want to own an asset-less company?
The entire loan-to-own/find the fulcrum security has always eluded me.
The real metric for solvency
The real metric for solvency isn't balance sheet solvency, its really do you have cash flows sufficient to meet your debt obligations. Its really when you miss a principal or interest payment that you're pushed into bankruptcy. So even if your hard assets are less than your liabilities, your enterprise's ability use those assets to generate certain cash flow itself has a value... which true-ups any value gap.
So you've got a distressed company with $1 billion liabilities and $400 million assets. There's a $600 million value gap. The company's incremental ability to generate cash flows is worth say $300 million... so total assets+"goodwill"=$400+300 million=$700 million. This is a conceptual value, not a DCF. Its the concept that if you take X, Y and Z asset and sell them, you'll get a certain price for them. And if you keep them as part of an enterprise, the enterprise is worth A. Analogous to goodwill.
Enter Loan-To-Own PE player. Like anyone purchasing an asset, they believe the value they can derive from that asset is above the price they are paying. So a PE investor looking at the above mentioned investment has a reason to believe they can actually generate more cash flows than are currently being generated by that enterprise. Under their management, the incremental value of the cash flows they can generate is $300 million. So therein lies to the value play.
These numbers may or may not make sense, but this is essentially whats going on. On top of that, you're entering in a distressed situation where you enter at a distressed pruchase price, can renegotiate contracts and terms with just about everyone from unions, financial counterparts, JVs, lenders, et al. Considering PE firms squeeze out plenty of value from a run of the mill going concern, there is a lot of value to be had in these situations.
Feel free to supplement, I'm sure it can be explained better.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
Is it easier to go for a
Is it easier to go for a boutique's restructuring group rather than their M&A group?
Just add mezz above
Just add mezz above preferred.
I think an easy way to think of loan to own is:
Company has 10mm in outstanding debt and had 3 creditors A, B, C
A = 2mm
B = 5mm
C = 3mm
B sells loan to hedge fund for 50 cents on the dollar for 2.5mm; hedge fund's claim to the Company is 5mm.
You get a lot of bickering amongst creditors during bankruptcy over valution (I have seen extremes from 500mm to 1.4bn). It's in B creditor's best interest to understate value of the Company and in C's interest to overstate the value
If B's valuation "expert" can convince judge that company is worth 4mm, B, which would be the fulcrum, would end up with some mix of debt and equity and A's debt would be reinstated at par or A would be paid cash and receive a partial loan and C would be wiped out. C's valuation "expert's" job is to convince the judge that the company is worth 8mm so C, which would be the fulcrum, can receive some sort of return. C could be another hedge fund or PE firm that paid say 20 cents on the dollar for the loan so if C does convince judge that the Company is worth 8mm, C's return (not annualized) if successfully exited is 83%
I get why at 4MM valuation C
I get why at 4MM valuation C would be wiped out, but why would B want that for themselves? Don't they want to cover their total claim of 5 MM?
I guess what I'm asking is why would B's best interest to understate value of Company? Wouldn't creditors always want judge to determine high value to ensure that there is 100% recovery?
Big4CPA wrote: I get why at
I get why at 4MM valuation C would be wiped out, but why would B want that for themselves? Don't they want to cover their total claim of 5 MM?
I guess what I'm asking is why would B's best interest to understate value of Company? Wouldn't creditors always want judge to determine high value to ensure that there is 100% recovery?
If your claim is for $5, and the judge decides the company is worth $10, your entitled to half the company. If your claim is $5 and the judge decides the company is worth $5, your entitled to the whole company.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
If you can convince the judge
If you can convince the judge that a company is worth less than what you really "know" it is, you get all of the equity upside.
If B can convince the judge that the company is worth 4mm but really believes with cost cuts, addt'l revenue growth, etc., it is really worth 6 or 7mm, B gets the additional 2 or 3mm upside if the judge rules in B's favor. remember A may get some cash and some equity but it's likely that a large portion of A's debt will be reinstated and most of the equity would go to B. Oversimplification and not that simple, obviously, but that's the gist of it.
Thanks guys, helped a lot.
Thanks guys, helped a lot.
Nice little discussion going
hunter is the shieet
*
Big4CPA: How was your
Sure, Top 50 University
*
Agreed. Being smart and
.
bump please, those interviews
and what exactly from the
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
Following the post.
Question for
At these 3 firms its not
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
What about LAZ?
Always be improving
I’m not going to any of those
I’m not going to any of those