Jan 24, 2024

Restructuring Questions

Is there game theory involved with equity / debt holders on restructuring and if so is there a Nash equilibrium that is reached?

Furthermore, lets say there was $300mm debt, but that gets restructured to $200mm debt and $50mm equity. Do the equity holders get a vote on the dilution or is the decision made by the board of the company or by the debt holders? Also can the restructuring give the debt lenders a lower total amount, in this case $250mm instead of $300mm?

Thank you.

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3mo

Ah, swinging in with the game theory and restructuring technicals, I see! Let's break this down:

Game Theory in Restructuring:
- Yes, game theory can play a role in restructuring scenarios, particularly when considering the actions and reactions of different stakeholders, such as equity and debt holders.
- A Nash equilibrium could be reached in a restructuring context when all parties choose strategies that result in an outcome where no party can benefit by changing their strategy while the other parties' strategies remain unchanged. This often involves negotiations and settlements where each stakeholder's payoff is maximized given the constraints of the others' actions.
Restructuring Debt and Equity:
- When a company undergoes restructuring and debt is converted into equity, the decision-making process regarding dilution typically involves negotiations between the company's board, its creditors, and sometimes its shareholders, depending on the jurisdiction and the specifics of the restructuring agreement.
- Equity holders may or may not get a vote on the dilution, depending on the terms of the debt agreements, the governing law, and whether the restructuring is happening out of court or in a bankruptcy scenario.
- In some cases, the restructuring plan, which includes the dilution of existing equity and the terms of the debt-to-equity swap, must be voted on by the shareholders. However, if the company is in bankruptcy, the court may confirm a plan over the objections of equity holders if it finds the plan to be fair and equitable.
Reduction in Total Amount Owed:
- Yes, restructuring can result in debt lenders agreeing to a lower total amount than originally owed, which is often referred to as a "haircut." This can happen when creditors believe that accepting a reduced amount is preferable to the potential losses they would face if the company were to liquidate or continue to deteriorate in value.

Remember, the specifics can vary widely based on the company's situation, the jurisdiction, and the preferences of the stakeholders involved. It's a complex dance, and every party wants to make sure they don't step on any toes—or worse, get their own toes stepped on!

Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Private Equity Recruiting Kicked Off?, Distressed Debt Hedge Fund out of College - Prep Advice, Why You Should Consider Restructuring – Common Misconceptions/Insight on RX Groups, Restructuring technicals and their difficulty

I'm an AI bot trained on the most helpful WSO content across 17+ years.

HF

Investment Analyst in HF - Event

3mo

Furthermore, lets say there was $300mm debt, but that gets restructured to $200mm debt and $50mm equity. Do the equity holders get a vote on the dilution or is the decision made by the board of the company or by the debt holders?

if the creditors aren't being made whole then very unlikely equity holders have much of a say. Equity in such a case will either be significantly diluted (creditors will own the majority of the equity) or worth 0. They are at the bottom of the pole and will be diluted without much say in the process. Senior creditors will usually drive the process and negotiate a plan with the company

Also can the restructuring give the debt lenders a lower total amount, in this case $250mm instead of $300mm?

yes principal can be haircut during debt restructuring

Authored by: Certified Hedge Fund Professional - Investment AnalystCertified Hedge Fund Pro

ER

3mo

Fascinating question (abt the game theory). Knowing close to ntg abt this topic, I tentatively posit that there's a principal-agent problem between the debt and equity holders (as always). They can't trust the other party so either there's no NE, or suboptimal NEs?

IB

Analyst 2 in IB-M&A

3mo

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