How do RX advisory shops make $$$?
Curious how the fees work for RX. Is it based on complexity of the deal? Or a percentage of the capital structure that's reorganized? Given how there's no one right solution, I'm unsure how fees are best aligned to ensure RX shops are incentivized to go to bat for the client and deliver the best solution. Also, differences b/w In-Court and Out-of-Court (i.e., given that the court mandates the maximum fees, is there one that RX firms prefer?).
Chiming based on my experience. There are 3 main ways an RX firm charges its clients. Mind you this is very generalized and could vary depending on size, creditor-side/debtor-side, and the overall complexity of the restructuring (multi lenders? capital markets? Offshore? Multilateral? etc etc.)
1. Success Fee
Most basic of them all, we used to charge 0.5%-2.5% of the total debt restructured (this includes AP, Tax Liabilities, pensions). I don't really know how we came to a set number to charge to clients, but we usually almost always wanted 60-70% of profit for each mandate. We usually include the costs of lawyers, appraisers, and DD consultants baked into our fees, but smaller mandates would necessitate us to exclude them so we could still maintain an image of "Hey we do care about you"
2. Fixed Fee
Personally, this is rare but i have seen it. Usually small shops charges fixed fees to maintain profit margins but couldn't command the percentage basis that more established shop could charge. My old firm used to charge a fixed fee as a safe guard so that the hours we put into a mandate doesn't go unpaid, but this is assuming only working standard business hours / days (which never really happen in RX)
3. Talior-made
Now this is what my old firm used most frequently. We don't have any standard ways of charging to clients, we judge them on a case-to-case basis. The largest mandate I've worked (debtor side) on has Fixed fees based on milestone, Staggered Success Fees (depending on how much we restructure), Contingent Fees (we do run a risk of being sued by creditors if something bad happens in court, this is basically a reimbursement with a minimum), and even "high-risk" consideration fee (Since the debtor party was owned by powerful individual and shady companies).
Of course the model vary from firm to firm, but this is what i've seen personally when i'm in the space.
Check retention apps / engagement letters in the bankruptcy docket
It’s most often a fixed monthly fee (typically $75-200k/month depending on size of the company) + transaction fees (restructuring fee is usually a predetermined fixed amount loosely based on amount of liabilities, financing/m&a fees are a percentage of the transaction value usually inline with typical IB advisory success fees) with some amount of crediting of monthly fees earned.
My bank does it using a retainer of $150k monthly then a completion fee. The fees vary based on the tranches that are restructured and if any new debt or equity is issued.
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