How to Prepare for Restructuring Technical Questions

South Sea Tulip's picture
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Mod note: This comment was originally posted in the thread "Restructuring Technicals" here. Many users found it useful so of course it would get front-paged. Enjoy! Click here to see more top rated comments.

Restructuring Interview Prep Resources

Stephen Moyer's Distressed Debt Analysis, while geared towards the investing side of distress, has a great overview of the bankruptcy system and the mechanics of debt. I'm sure having done interview prep, you all have probably read Houlihan Lokey's case study, but that also will give you a good overview (http://www.>HL.com/library/bsttcacs.pdf).

Another great resource is the Distressed Debt Investing blog (http://www.distressed-debt-investing.com/), although it gets a little more technical in terms of valuation/investing, it's still a great read and will keep you up to date on the latest distressed companies out in the market.

Cap Tables and Restructuring Preperation

In terms of technical skills, the most basic analysis you'll need to do in restructuring is understanding the cap structure of a company and making cap tables. You will make a lot of cap tables. Basically, it's an analysis that shows the different debt structures in place at the company, starting with the most senior debt at the top (typically term loans and secured), then 2nd lien debt, then senior unsecured debt, then generally mezz or high yield bonds (typically unsecured). If you don't know the difference between secured/unsecured, senior/junior, loans/bonds, guaranteed/non-guaranteed, spend some time and Google the differences. Then finding the leverage at each tranche of debt. For example, if a company has $100M of term loans, $100M of 2nd lien, and $100M of bonds for debt, and also $100M of EBITDA, then the you can track the leverage through the different tranches: 1x leverage through the TL, 2x leverage through the 2nd lien, and 3x leverage through the bonds. This is used to for the "waterfall" of value should the company have to sell itself to figure out who gets paid. If the company is only sold for $250M, then the TL and 2nd liens are paid through, while the bonds are considered the "fulcrum" security (i.e., they are the security where value runs out).

Besides leverage, a cap table can be used to calculate interest coverage ratios to see if the company is in danger of breaching its covenants. Covenants are essentially rules that lenders include in loan documents/indentures to prevent the borrower from doing crazy things with their money. So there's a lot of different covenants (affirmative, negative, and financial). You'll probably focus most on financial covenants, which dictate that the company can't exceed a certain leverage, has to maintain certain coverage ratios, etc.

Reviewing Public Filings for Restructuring Interviews

You can create the above cap table almost purely with public 10-Ks and Qs, so get familiar with reading those if you haven't already. Another main component of cap tables is pricing, but that is generally only available through paid services (e.g., Bloomberg, SMI, ADI, etc.). If you have access to those, learn how to find pricing and yields (should be pretty basic).

Reviewing Credit Documents and Indentures

The least exciting part (in my opinion) of restructuring work is combing through credit docs and indentures. These are also publicly available via company filings, usually attached to 10-Ks in the appendix or in an 8-k. The other thing you'll need to be familiar with is going through PACER, which is the database for court documents. When a company is going through bankruptcy, they'll have to file documents to PACER, which is publicly available, but can cost a few cents to a dollar to access (I think). Sometimes major court cases will have the documents available for free from different news sources. The main documents you'll need to familiarize yourself with is the disclosure statement and the plan of reorganization. The POR is basically the company's plan on how to emerge from bankruptcy. It will contain useful information such as the background of why the company filed, the claimants, the capital structure of the company, and more. The disclosure statement is essentially a shorter summary (but not by much) of the POR. It's meant to be easier to read and will often contain forward looking projections in the appendix.

Now, I know that when you were looking for advice on technical skills, you weren't expecting learning how to go through a database or read credit docs. But to be honest, those are skills that will probably take you the longest to master, and will take you an inordinate amount of time without practice. If you can get a headstart on that, I think it will benefit you greatly.

Happy to answer any further questions regarding restructuring, best of luck for the summer.

You can also check out a detailed video about restructuring below.

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Comments (75)

Jan 31, 2014

Thank you for the post. SB
I also have a question.
As restructuring is involved with the law system of a country, do you happen to know how transferable is the skill-set gained in one country in another law system? Are restructuring teams usually set up nationally or do they do cross-border work as well?
To explain, I am in Europe myself, planning to look into London restructuring opportunities but would later on try to work in continental Europe.

Jan 31, 2014
hello2u:

Thank you for the post. SB

I also have a question.

As restructuring is involved with the law system of a country, do you happen to know how transferable is the skill-set gained in one country in another law system? Are restructuring teams usually set up nationally or do they do cross-border work as well?

To explain, I am in Europe myself, planning to look into London restructuring opportunities but would later on try to work in continental Europe.

You're correct that restructuring is often very specific to the country. For instance, the U.S. is very debtor friendly during bankruptcy while in Europe, I've heard that it is more creditor friendly. That said, when I was an analyst at one of the major restructuring shops, when we did have an international deal we often worked in conjunction with the bankers who were stationed or specialized in that particular country. Some skills and concepts are very similar, no matter what the country, since at the end of the day restructuring is all about a reallocation of value among a number of parties. What options you have and what levers you can pull to accomplish that can vary though.

Jan 31, 2014

Having worked in restructuring in both Europe and the US, i would say the skill set is very comparable. While the different legal systems makes it not perfectly comparable, a lot of what you'll be doing is the same. You'll be diligencing a company, monitoring liquidity, understanding it's ability to service debt, figuring out the appropriate way to whack up the value, reading the credit docs, etc., all of which is pretty much the same regardless of what country you're in. That being said, different jurisdictions have different insolvency regimes, so how you implement a restructuring will be different from country to country. It will take you some time to appreciate the legal differences between jurisdictions (which is where good local counsel helps a lot). The other thing to think about is that just because you're working in London, doesn't necessarily mean you'll just be doing UK restructurings. The London office may be the hub restructuring work throughout the rest of Europe, unless a bank has a restructuring practice in a particular country (i.e., it's very possible a bank would have a restructuring practice in france or Germany, less likely it would have one in Romania, so if it's a Romanian deal, it's probably being done by the UK office anyways).

    • 4
Feb 10, 2014

Very useful. SB for you!

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

Feb 10, 2014

So when you are dealing with an Rx, does the country of domicile of the issuer take precedence over all other laws where they have debt issued? So if a company from Europe issues USD debt (along with normal EUR debt), the laws of the nation it (the entity) is incorporated in trumps all others?

Let me know if that question doesn't really make sense.

Feb 11, 2014

Agree with everything that's been said here. What you learn in restructuring is largely transferable to any jurisdiction and, from a junior perspective, is relatively similar regardless of where you're at in the globe (cap structure tables, cash flow modeling, credit doc review, etc. - i.e. core distressed analysis doesn't change too much). Jurisdictional differences start to affect restructuring bankers when you work your way up the food chain and need to be well versed with strategy differences among countries. Either way, in restructuring you're always working with lawyers who have the local knowledge on legal limitations / strategy as well.

Anihilst - You're question is a bit complicated as it depends on governing law of legal docs / country of incorporation. It can get a bit tricky in certain jurisdictions where HoldCo is, say, in Luxembourg for tax purposes but OpCos are in France

    • 1
Feb 17, 2014

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185

I would also recommend Distressed Debt Analysis by Stephen Moyer. I think that it does a very good job of going through the bankruptcy process of a company and what happens to the different parts of the capital structure during a bankruptcy proceeding, how values are affected and how investors psychology in trying to 1-up one another, other creditors and the debtor when investing in these kinds of securities and assets. It's a little lighter on the hardcore financial valuation but that's outside the scope of what the author is trying to accomplish as there are other fine books that go into debt valuation more deeply. If anyone wants a copy or summary feel free to msg me.

Aug 19, 2014

Interested in this as well

Aug 19, 2014

Interested.

Aug 19, 2014

Also interested.

Aug 19, 2014

bump

Best Response
Aug 19, 2014

I don't think those courses are necessary in the slightest. Stephen Moyer's Distressed Debt Analysis, while geared towards the investing side of distress, has a great overview of the bankruptcy system and the mechanics of debt. I'm sure having done interview prep, you all have probably read Houlihan Lokey's case study, but that also will give you a good overview (http://www.HL.com/library/bsttcacs.pdf). Another great resource is the Distressed Debt Investing blog (http://www.distressed-debt-investing.com/), although it gets a little more technical in terms of valuation/investing, it's still a great read and will keep you up to date on the latest distressed companies out in the market.

In terms of technical skills, the most basic analysis you'll need to do in restructuring is understanding the cap structure of a company and making cap tables. You will make a lot of cap tables. Basically, it's an analysis that shows the different debt structures in place at the company, starting with the most senior debt at the top (typically term loans and secured), then 2nd lien debt, then senior unsecured debt, then generally mezz or high yield bonds (typically unsecured). If you don't know the difference between secured/unsecured, senior/junior, loans/bonds, guaranteed/non-guaranteed, spend some time and Google the differences. Then finding the leverage at each tranche of debt. For example, if a company has $100M of term loans, $100M of 2nd lien, and $100M of bonds for debt, and also $100M of EBITDA, then the you can track the leverage through the different tranches: 1x leverage through the TL, 2x leverage through the 2nd lien, and 3x leverage through the bonds. This is used to for the "waterfall" of value should the company have to sell itself to figure out who gets paid. If the company is only sold for $250M, then the TL and 2nd liens are paid through, while the bonds are considered the "fulcrum" security (i.e., they are the security where value runs out).

Besides leverage, a cap table can be used to calculate interest coverage ratios to see if the company is in danger of breaching its covenants. Covenants are essentially rules that lenders include in loan documents/indentures to prevent the borrower from doing crazy things with their money. So there's a lot of different covenants (affirmative, negative, and financial). You'll probably focus most on financial covenants, which dictate that the company can't exceed a certain leverage, has to maintain certain coverage ratios, etc.

You can create the above cap table almost purely with public 10-Ks and Qs, so get familiar with reading those if you haven't already. Another main component of cap tables is pricing, but that is generally only available through paid services (e.g., Bloomberg, SMI, ADI, etc.). If you have access to those, learn how to find pricing and yields (should be pretty basic).

The least exciting part (in my opinion) of restructuring work is combing through credit docs and indentures. These are also publicly available via company filings, usually attached to 10-Ks in the appendix or in an 8-k. The other thing you'll need to be familiar with is going through PACER, which is the database for court documents. When a company is going through bankruptcy, they'll have to file documents to PACER, which is publicly available, but can cost a few cents to a dollar to access (I think). Sometimes major court cases will have the documents available for free from different news sources. The main documents you'll need to familiarize yourself with is the disclosure statement and the plan of reorganization. The POR is basically the company's plan on how to emerge from bankruptcy. It will contain useful information such as the background of why the company filed, the claimants, the capital structure of the company, and more. The disclosure statement is essentially a shorter summary (but not by much) of the POR. It's meant to be easier to read and will often contain forward looking projections in the appendix.

Now, I know that when you were looking for advice on technical skills, you weren't expecting learning how to go through a database or read credit docs. But to be honest, those are skills that will probably take you the longest to master, and will take you an inordinate amount of time without practice. If you can get a headstart on that, I think it will benefit you greatly.

Happy to answer any further questions regarding restructuring, best of luck for the summer.

    • 20
Aug 19, 2014
South Sea Tulip:

Thanks for that detailed response. Makes a ton of sense and probably saved me tons of time.

Regarding the "combing through" of credit documents, what exactly are you looking for? Do you mean that what we end up finding in the credit documents are used to populate our cap table?

In general, from what I understand, it's more important to understand debt inside out. Common types of covenants, typical leverage for comparable companies, how a specific covenant may or may not change the leverage we're comfortable with.

Please let me know if I'm mistaken. Thanks again.

Aug 19, 2014
South Sea Tulip:

I don't think those courses are necessary in the slightest. Stephen Moyer's Distressed Debt Analysis, while geared towards the investing side of distress, has a great overview of the bankruptcy system and the mechanics of debt. I'm sure having done interview prep, you all have probably read Houlihan Lokey's case study, but that also will give you a good overview (http://www.HL.com/library/bsttcacs.pdf). Another great resource is the Distressed Debt Investing blog (http://www.distressed-debt-investing.com/), although it gets a little more technical in terms of valuation/investing, it's still a great read and will keep you up to date on the latest distressed companies out in the market.

In terms of technical skills, the most basic analysis you'll need to do in restructuring is understanding the cap structure of a company and making cap tables. You will make a lot of cap tables. Basically, it's an analysis that shows the different debt structures in place at the company, starting with the most senior debt at the top (typically term loans and secured), then 2nd lien debt, then senior unsecured debt, then generally mezz or high yield bonds (typically unsecured). If you don't know the difference between secured/unsecured, senior/junior, loans/bonds, guaranteed/non-guaranteed, spend some time and Google the differences. Then finding the leverage at each tranche of debt. For example, if a company has $100M of term loans, $100M of 2nd lien, and $100M of bonds for debt, and also $100M of EBITDA, then the you can track the leverage through the different tranches: 1x leverage through the TL, 2x leverage through the 2nd lien, and 3x leverage through the bonds. This is used to for the "waterfall" of value should the company have to sell itself to figure out who gets paid. If the company is only sold for $250M, then the TL and 2nd liens are paid through, while the bonds are considered the "fulcrum" security (i.e., they are the security where value runs out).

Besides leverage, a cap table can be used to calculate interest coverage ratios to see if the company is in danger of breaching its covenants. Covenants are essentially rules that lenders include in loan documents/indentures to prevent the borrower from doing crazy things with their money. So there's a lot of different covenants (affirmative, negative, and financial). You'll probably focus most on financial covenants, which dictate that the company can't exceed a certain leverage, has to maintain certain coverage ratios, etc.

You can create the above cap table almost purely with public 10-Ks and Qs, so get familiar with reading those if you haven't already. Another main component of cap tables is pricing, but that is generally only available through paid services (e.g., Bloomberg, SMI, ADI, etc.). If you have access to those, learn how to find pricing and yields (should be pretty basic).

The least exciting part (in my opinion) of restructuring work is combing through credit docs and indentures. These are also publicly available via company filings, usually attached to 10-Ks in the appendix or in an 8-k. The other thing you'll need to be familiar with is going through PACER, which is the database for court documents. When a company is going through bankruptcy, they'll have to file documents to PACER, which is publicly available, but can cost a few cents to a dollar to access (I think). Sometimes major court cases will have the documents available for free from different news sources. The main documents you'll need to familiarize yourself with is the disclosure statement and the plan of reorganization. The POR is basically the company's plan on how to emerge from bankruptcy. It will contain useful information such as the background of why the company filed, the claimants, the capital structure of the company, and more. The disclosure statement is essentially a shorter summary (but not by much) of the POR. It's meant to be easier to read and will often contain forward looking projections in the appendix.

Now, I know that when you were looking for advice on technical skills, you weren't expecting learning how to go through a database or read credit docs. But to be honest, those are skills that will probably take you the longest to master, and will take you an inordinate amount of time without practice. If you can get a headstart on that, I think it will benefit you greatly.

Happy to answer any further questions regarding restructuring, best of luck for the summer.

Thanks for the link to HL. I had actually never read it until now. It is very comprehensive and well written and can well be considered as the Restructuring equivalent of Rosenbaum & Pearl's book, except it is provided free of charge!
My only quibble with the case study presented is that they kind of disregarded the part where the Father personally guaranteed the company loans. That would have made a huge difference in the motivation of the company officers and other actors re bankruptcy vs out of court restructuring/workout, especially given the quote from the creditor who claims to want to the shake the last penny out of the father to pay him back (paraphrasing here).

Also interesting to note that under the standard scenario presented in this case study the only difference between the company proposed workout plan and the bankruptcy asset auction plan is that cash consideration is $64mm in former vs $73mm in latter, everything else is exactly the same. Ergo unsecured creditors get substantially more recovery with a bankruptcy. If the father/chairman had his 19mm personal guarantee on the hook then this picture would look a bit different.

Aug 19, 2014

Yes, exactly. Though you'll use credit docs for lots of other purposes greater than just putting together a cap table (more on this later).

The credit doc will help you populate the cap table by providing the following (and more I'm probably missing) useful info:

- Principal amount
- Interest rate (including LIBOR floors, default interest, whether it's PIK, PIK toggle, or different LIBOR spreads depending on maturity/covenant levels)
- Legal entity that the debt sits at (very important because in some cases, an unsecured piece of debt sitting at a valuable subsidiary actually has a higher priority to that sub's assets than a senior secured piece of debt sitting at the parent, known as structural subordination)
- Maturity of the debt
- Covenants
- Guarantors/Secured status

Now besides that basic info, the credit doc will be your (or your associate/VPs) best friend when determining the content of your pitch to troubled companies. For instance, let's say your VP has identified a company that, for whatever reason, could be in distress. He or she will tell you to put together a cap table of the company and then your team will use that analysis to see where the pain points of the company are. Generally, it can broadly be grouped into:

(1) Upcoming Large Maturity - Look at the company's cash balance in relation to its upcoming maturities and principal outstanding. Oftentimes the company will simply refinance the debt, but some times depending on the troubled status of the company, it may not be able to do so.

(2) Cash Flow Concerns - Look at the company's coverage ratios and cash balance. If the company has too many obligations such as interest and capex relative to its cash balance and cash flow generation, then it could be a candidate for a restructuring.

(3) Covenant Breach - The company may breach financial covenants set out in its credit agreement/indentures. Common financial covenants include maximum leverage, minimum interest coverage, minimum EBITDA, maximum capex, minimum cash balance, etc.

(4) Overleveraged Capital Structure - The company might just have too much leverage to be sustainable. You can see that on the cap table and compare it to peers.

(5) General Industry Decline/Operational Issues - The company may simply be in a negatively trending industry. For instance, the publishing industry has had a few cases in recent years as people switch to digital. You can generally tell based on negative EBITDA trends and low debt market pricing (generally if your subordinated debt is trading less than 70-80, it's worth taking a look at)

I'm sure I'm missing a few drivers of distress, but that gives you a decent base. Now here's where it gets tricky and is usually beyond the work of an analyst. Based on the credit documents, your associate/VPs will be devise a creative strategy to pitch to the client. The credit docs will govern your ability to raise additional debt (for example, in the case above where there is cash flow concerns) and will dictate what assets, if any, are available to secure the debt and make it more attractive to the market. In the case of an overleveraged capital structure, you would look in the credit docs to figure out where the debt actually sits and what the debt is secured by. In some cases, you may be able to carve out that legal entity and file for bankruptcy only a section of the company. In general, the credit docs will provide your team with the rule book by which, as bankers, you'll try to get creative and find transaction structures to benefit your client.

In answer to your last question, yes, knowing debt in all shapes and sizes is important. Just knowing the terms will benefit you far more in general than taking an expensive prep course. Though that's not to say that you shouldn't be proficient at modeling. I think some would make the argument that restructuring tends to be even more modeling and detail focused than M&A due to the bankruptcy court aspect (much of your analysis is examined in court to determine value of a company for purposes of the recovery waterfall, so it's not as easy as pulling a 7.0x multiple out of your ass just because "that's what these kind of companies trade for").

    • 19
Aug 19, 2014
South Sea Tulip:

Yes, exactly. Though you'll use credit docs for lots of other purposes greater than just putting together a cap table (more on this later).

Thanks for writing some really awesome posts.

'Before you enter... be willing to pay the price'

Aug 19, 2014
South Sea Tulip:

are a lot of these ratios or levels based on historical precedents, adjusted for the current conditions, or mainly set for each scenario (1x leverage on the senior secured based on the easily accessible assets)? Thanks for the read.

Aug 19, 2014
South Sea Tulip:

Again, thanks for that gem SST. Have a couple follow ups.

1. I'm at a debtor-side focused shop. Is the information provided applicable to both debtor and creditor side?
2. The duties of the analyst you described are mainly processing information. Basically taking information from a credit doc and framing it on a spreadsheet so that it's more easily read. I was wondering, what types of analysis specifically are used to diagnose the distressed company (ie. pin the problem on one of the 5 issues you mentioned) or is this usually done by the senior people from experience?
3. Once the problem has been diagnosed, what analysis is done after a turnaround/restructuring plan is brainstormed by the VPs/MDs? I imagine this is where the bulk of the technical work lie, cooking up analysis to justify the proposed plan to the client (debtor in my case).

Thanks again SST. I'd SB you if I could.

Aug 19, 2014

why sb, you handsome slut

Aug 19, 2014

Thank you so much for the very helpful response South Sea Tulip!

Aug 19, 2014

Sb to you, Tulip. Not In a restructuring group but enjoyed the read anyway. WSO needs more posts like this.

Aug 19, 2014
LifestyleBanker:

Sb to you, Tulip. Not In a restructuring group but enjoyed the read anyway. WSO needs more posts like this.

Agreed. Great stuff.

Aug 19, 2014

+1 for both your posts, this is the kind of content that makes this site worthwhile.

Aug 19, 2014

I would say RX probably lends itself to fewer technical questions than M&A or even other coverage groups. You don't need to know how to calculate accretion/dilution, effects of synergies, purchase price allocation, etc...

All you need to know is how to value the business (DCF and comps), and how that value flows down to all the different tranches of debt. The rest is very qualitative knowledge, like understanding credit agreements/indentures, concepts such as structural vs contractual subordination, and what is and isn't possible in out of court vs in court restructurings.

Aug 19, 2014

thanks for the information mrb87, but I thought that restructuring in a way is even more technical/analytical than M&A? and rx bankers have told me that they still do m&a modeling... clarification is much appreciated.

Aug 19, 2014

My first post simply to thank you for your great answers, even though I'm in a totally different field. Very interesting.

Aug 19, 2014

Best thing you can do is learn to skim credit docs and key in on important info. Its a very similar skill to skimming a 10-k. Being able to do and update a cap table will make you useful day 1 (there are little things like using bids that you can pick up on the job). Maybe go on PACER and read a few plans of reorg too.

Again, unlikely you will be expected to know any of this coming in, but if someone did I would be excited about them and much more likely to get them visibility if they do a good job.

Aug 19, 2014

good stuff Tulip, had to toss you the SB

Aug 19, 2014

Would SB if I could. That was just interesting all around.

Aug 19, 2014

Interesting post and intereting replies.

I have some questions regarding the deal aspect. Reading through the posts, I figured out that bankers can either represent the debtor-side or the creditor-side.

The tpyical case I see is, the biggest lender internally rates the company lower to a level where the bank ahs to take an action to actively protect their credit. Then, this biggest lender approaches other lenders and forms a lender committee.

After the lender committee is formed, the first action the biggest lender will take is to collect all outstanding loans, securities backing the loans, and other necessary information from the other lenders to determine the claim amounts that each bank has. Then right after the amount is determined, the committee will reach an agreement that no party will be able to enforce the company to pay off their principal amount of the loan until a report is finished. The company will usually hire an accounting firm do conduct a due dilligence on the company's debt and assets and write off some amounts. After the right book value is ascertained, the accounting firm will value the company, and then make a table that includes the recovery rate of each bank in varying scenarios.

If the company's going concern value is bigger than the liquidation value, then the lenders hava a legitimate basis to defer the maturity date of the prinipals that come due, and might even lend out more. When there are additional funding needs from the company, then the lender committee will be held again, and then the accountants will verify that how a new loan to the company will benefit their operations and etc. After that conclusion is reached, they will asign new reocovery rates to each banks, and if there are hold-outs, then they might factor that in as well to make the numbers right.

Then, in the case above, which side does the accounting firm represents? I think it's the creditor-side, because even though the fees are paid by the company, the mandate was given to solely solve the lenders' outstanding problems.

And what roles do the non-accounting restructuring firms take? Do they simply perform the same function as the preceding accounting firm does and compete directly with them?

I am cursious about how the restrucring firm(e.g. firms like HL, LAZ ,BX, BM etc) approaches their account and how they consult their clients, whether it is a bank or a company..

    • 1
Aug 19, 2014

Thanks SST. Quick question, could you identify the differences between restructuring, reorganization, workout and turnaround. Any specific differences (in court vs. out of court) or do they refer to the same things.

Aug 19, 2014
crawl_b4-bawl:

Thanks SST. Quick question, could you identify the differences between restructuring, reorganization, workout and turnaround. Any specific differences (in court vs. out of court) or do they refer to the same things.

I know you asked SST but here are my takes. The answer is a resounding NO, they do not refer to the same things at all. In fact, the terminologies in restructuring are very specific and legalistic, with very narrowly defined meaning for each term, as demonstrated in my exchange with SST in the preceding 2 posts.

Turnaround is arguably the most benign scenario from the company's perspective, it simply means measures taken to improve the company's performance, such as layoff, new share issuances, debt offering, change in management or other measures that improve operational efficiency. You can think of this as the patient (company) having some chronic illness that necessitates medications, medical treatments and change in life style, diet etc so that she can be returned to optimal health.

Reorganization happens when the patient is gravely ill and considered near death. Drastic measures are taken to keep it alive and away from death (bankruptcy). Usually significant changes to the firm's capital structure takes place along with asset sales to raise liquidity, re-negotiation of existing obligations with creditors etc. basically the scenario proposed by the company officers in the HL case study SST linked to. Also GM was a chapter 11 reorganization orchestrated by the Obama administration, even thou it was arguably a better idea to simply let the company go bankrupt and restructure/work out, as Romney suggested in an editorial.

Restructuring and workout both happen after the patient dies. Unlike homo sapiens (except Lazarus), however, dead companies can, and many do eventually, come back to life. In fact some companies go in and out of bankruptcies (die and revive after restructuring) several times in a row, in true video game fashion.
Workout is also known as out of court restructuring. This is the scenario that eventually took place in the HL case study. All shareholder equity gets wiped out and depending on the company's perceived valuation and capital structure, some debt holders swap their debt positions to equity in the new company post restructuring. SST's post does a very good job explaining the mechanism behind this within the U.S context.

If no agreement can be reached among the creditors and management, then the company goes into liquidation or chapter 7 within the U.S context. When that happens then the patient dies for real and is cremated with all her possessions sold off so that there is no chance of her ever coming back to life.

Internationally, how restructuring or workout takes place is very much contingent upon the specific legal framework of the jurisdiction where this takes place. The U.S has a very well established legal framework and precedents to deal with bankruptcy and restructuring cases, including specific laws governing foreclosure, debt-equity swap, fulcrum, orderly liquidation etc. As such, often participants can form realistic assessments of how judge is expected to rule on a case based on rulings of similar cases earlier.

The same, however, is not the case with most countries in the world. Thou a few countries like Germany are making changes to their laws to mimic the Anglo Saxon restructuring legal framework.

In particular, whether formal court driven restructuring or out of court settlement is more considered more desirable is entirely a function of each participant's expectation. If a creditor is convinced that the judge would be sympathetic to his claims then he would likely be inclined to support restructuring. On the other hand, many prefer out of court settlement/work out because they are unsure of how the judge would rule-- this concern is tantamount in non-Anglo countries, whether it is China or Spain. Also out of court settlement can be considerably less time consuming and costly (lawyers fees are expensive and add up very quickly) than going through the labyrinth of court systems with potential for multiple appeals all the way to the supreme court. I have seen the same distressed investor chooses to go to court for one position while decides to settle on another. It is all very much case specific.

Aug 19, 2014

Lazard-us? bruce Wasserstein is alive? sorry for the digression

Aug 19, 2014

I am still confused about the differences between turnaround and reorganization.

So, you are saying that reorganization always has to be governed under chapter 11? What if the bondholder committe is formed, and they voluntarily agree to conduct debt-to-equity swap and re-negotiation of outstanding loans and bonds with the creditors? These can't be done in a turnaround process?

Sorry for my ignoorance. I guess I should finish Moyer's book as soon as possible..

Aug 19, 2014
sanjose04:

I am still confused about the differences between turnaround and reorganization.

So, you are saying that reorganization always has to be governed under chapter 11? What if the bondholder committe is formed, and they voluntarily agree to conduct debt-to-equity swap and re-negotiation of outstanding loans and bonds with the creditors? These can't be done in a turnaround process?

Sorry for my ignoorance. I guess I should finish Moyer's book as soon as possible..

No it dosen't. Chapter 11 is when you reorganize in court. The example you give of voluntary agreement between creditors and management is out of court reorganization.

Aug 19, 2014

Just to share 2 additional threads that i have come acrossed which could be helpful to the rest though i have no interest in restructuring. Most of it have been spoken down here already. Fyi.

http://www.wallstreetoasis.com/forums/distressed-d...

http://www.wallstreetoasis.com/forums/info-on-rest...

http://www.wallstreetoasis.com/forums/i-want-to-le...

Aug 19, 2014

Great article from WSJ today on how certain European countries are now adopting a U.S Chapter 11 style bankruptcy code to deal with growing corporate insolvencies and their duress on the lenders:

http://online.wsj.com/article/SB100014241278873232...

It points out the key difference between the way restructurings were (or still are) typically done in Europe vs The U.S:

"For the bulk of Europe, the only way to do a restructuring was to avoid insolvency proceedings (by doing out of court debt restructuring), while in the U.S., in order to get a restructuring done, you start off by going into Chapter 11"

Aug 19, 2014

Thanks for the article! very interesting.

Would I be correct in assuming that even in the US, out of court restructurings are usually preferred by pretty much all parties involved (less hassle)? Also, for the firm that's acting as a restructuring advisor, does an in-court or out-of-court restructuring generate more revenue?

Thank you!

Aug 19, 2014
justheretovisit:

Thanks for the article! very interesting.

Would I be correct in assuming that even in the US, out of court restructurings are usually preferred by pretty much all parties involved (less hassle)? Also, for the firm that's acting as a restructuring advisor, does an in-court or out-of-court restructuring generate more revenue?

Thank you!

You can refer to my earlier longer post in this thread on the merits of workout vs restructuring. I don't think in or out of court restructuring per se has much impact on the advisory fees. Typically the restructuring advisor gets a retainer when they take on a project and then a percentage of the deal value as success fee upon closing, independent of whether it was done in or out of court.

    • 1
Aug 19, 2014

Thoughts?

Aug 19, 2014

Hi there. For analyst interview I would expect to get questions on

1) Value break
2) Differences between Senior debt, Junior debt, Mezzanine and quasi equity. Understanding the notion of a SFA, JFA and intercreditor arrangements
3) Differences between Fixed and floating charges
4) Basic loan documentation terms - acceleration, enforcement, permitted payments, payment restrictions, standstill provisions, EoD, MAC etc. Understanding provisions preventing a EoD, including an equity cure
5) Understanding of financial covenants (positive financial undertakings), and appreciation of how the defined terms used for calculation, (net debt, EBTIDA, debt service, interest due, Cashflow) are subject to clear methods of calculation in the documentation
6) Understanding of what the triggers of restructuring are (hint: Liquidity, covenant breach, maturing debt)
7) Understanding what metrics/market indicies restructuring bankers look at for potential targets (loan pricing on markit, HY bonds YTM on bloomberg, specialist debt websites like capital IQ and debtwire)
8) Clear understanding of the differences between Company, sponsor, senior/creditor side roles on restructuring, and what kind of deals the bank has done recently
9) Basic understanding of Scheme of Arrangement / CVA / Pre-packs
10) Understanding of what a vanilla debt for equity swap would entail.
11) Clear understanding of modelling debt (calculation of cash interest, PIK, accured interest, margin ratchets, repayment schedules, cashsweeps etc.)

If you know all this, you should be on it.

    • 3
Aug 19, 2014

I recently had a chat with an Associate within the Restructuring Group at HL. She gave some helpful pointers re interview prep -- if anyone is interested, please PM me. Also, I am hoping I can get some clarification re two questions/points related to restructuring:

  1. Concept of value break and what price various debt tranches would trade at based on a company's valuation
  2. Calculating debt capacity of a distressed company using EBITDA, cash and valuation multiple. This may be really dumb, but am I missing something here?

Thanks!

Aug 19, 2014

1- Restructuring is beginning to slow down a bit already as the economy is showing signs of improvement. It will continue to cool down, but unlike M&A even in a down swing in restructuring (an upswing in the economy/M&A) there are still some pretty significant distressed situations developing. That being said, its not exactly the ideal place to be if your peers are getting some serious M&A experience. Think about it... you're not going to stack up next to the kid with two M&A deals under his belt. Also... restructuring deals tend to drag on considerably longer than an M&A deal, so thats another consideration. Restructuring deals could go anywhere from 3 months to a year+ vs. your peers where their M&A groups are churning M&A deals every 3-6 months. So to answer your question, restructuring is still a good space to get some valuable experience even in an economic upswing but would probably be viewed less favorably by PE recruiters as compared to M&A experience in the same period. Obviously a distress/special situations fund is not applicable to this logic.

2- Yeah, boutiques do tend to have the strong/more active restructuring groups. BB's do often restructuring transactions because they find themselves in the situation.

3- My person opinion is that reputable boutique restructuring experience > JPM, BarClays restructuring

You seem to be focused on how restructuring will position you for PE recruiting, HF recruiting is a different story. All else equal, in an upturn M&A exposure > Restructuring exposure.

Aug 19, 2014

PE shops are very focused on M&A experience. There will be less M&A solutions for struggling companies as lenders are willing to kick it down the can.

It is definitely unique and can be at times fairly operational, which PE firms respect a lot.

Aug 19, 2014

M&A dealflow is faster no doubt, but restructuring has a good deal of M&A modeling, and the modeling is actually more in depth given the razor thin margins of cash the distressed company is surviving on, without DIP financing. If you do 363 sales (which are done in 90% of ch11s), then you will see a good deal of M&A activity from the banking side. Is it better than M&A, probably not, but the modeling and exposure you get is still not to be dismissed. That said, there are far fewer restructuring bankers than there are M&A bankers, so getting is tougher, but on the flip side there's less demand for restructuring banking than for traditional M&A.

Good luck
HBS 09
Wharton 03

Aug 19, 2014

Ditto to the above for a lateral position. I've been warned of sever push you 'til you know no more technicals, would REALLY appreciate examples beyond people just saying "know cap structure" etc..

you can have SBs and all that jazz if you want.

Aug 19, 2014

bamp!

Aug 19, 2014

i think you'll be fine.

I'm making it up as I go along.

Aug 19, 2014

I work in restructuring. Check your PM. We can do a short call.

Aug 19, 2014
Lask3r:

I work in restructuring. Check your PM. We can do a short call.

this is impressive! is it common on this forum for people to connect offline as well?

Cheers!

    • 1
Aug 19, 2014

Depends, is this entry level or lateral?

Aug 19, 2014
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