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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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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).
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.
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:
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").
The information I've presented above is applicable to both sides, for the most part. I actually started at a debtor-side focused shop and only did two deals representing the creditor side, so my views and experiences are biased towards debtor-side.
After the cap table, probably the most common analysis you'll need is just a liquidity rollforward. That's where you project out the company's cash flows into the future to see at what point there might be a "liquidity event", whether that be a large maturity of debt, large required capex spend, or maybe when you run out of cash purely through operations. You'll generally start with EBITDA at the top (using analyst reports, CapIQ, Factset as means of projection, though if you don't have access to those or the company is not covered, you'll have to make reasonable assumptions yourself) and then calculate unlevered free cash flows taking out things like capex, working cap, taxes, etc. Then you can calculate levered free cash flows taking out interest and maturity payments. Say you do this calculation and you see that the company does fine until two years from now, they are projecting a $200M capex requirement but will only have $50M in balance sheet cash. Maybe the company has enough revolver capacity but that might bust covenants. If they don't have the capacity, they'll need to raise debt. But what if they can't?
Similar to the liquidity rollforward is the covenant rollforward which basically does the same thing as the above, but instead of checking how cash performs, you might look at senior leverage or coverage ratios.
I think that mrb87 is correct in the sense that restructuring, by not really dealing with the equity side of capital, doesn't have to do as many different types of analyses such as accretion/dilution, synergies, etc. as he mentioned. However, I think an argument could be made that more time and detail is spent in restructuring on the actual valuation of the company. Let me explain.
I mentioned this earlier, but valuation plays a big part in determining who the fulcrum security is in a restructuring. I think for people unfamiliar with restructuring, it's easy to downplay just how important this is. In my opinion, this is the MOST INTERESTING part of restructuring.
Take this example capital structure: $200M 1st Lien, $200M 2nd Lien, $100M Senior Notes and then some equity. For whatever reason, the company decides to file for bankruptcy. Now, say the value of the company determined in the Plan of Reorganization ("POR") is $350M. The 1st Lien gets paid off in full, the 2nd Lien gets $150M. The Senior Notes and equity get wiped. That was easy right? Simply going down the recovery waterfall. Well you would be wrong. That $350M valuation number is the subject of much contention because it is inherently an unknown number. You can bet that the Senior Note creditors will be arguing to the court that the value is actually $450M or higher. And this is important to remember: restructuring is a zero-sum game. Ultimately, there true, unknown value of the company is only so much. So for each dollar that the Senior Note creditors extract is less for everyone else.
Adding further to the complication is the type of consideration given out in recovery. It can be a mixture of cash, debt, and equity. How that is allocated is based on a number of factors such as: investor appetite for risk, views on potential upside, etc. For instance, in the first example where the value of the company was $350M, say that $50M is equity and that the 1st Lien gets $30M of that and the 2nd Lien gets the remainder of $20M. A year out of bankruptcy we find out that the company is actually worth $500M! Wow! Suddenly there is $200M of equity value, which means that that the 1st Lien's $30M is now worth $120M and the 2nd Lien's $20M is now worth $80M! So in this situation, if the 1st Lien had a strong inkling that the company was undervalued in the POR, they would aggressively try to get most of their recovery in equity to get that upside.
Based on the preceding two paragraphs, you can see why valuation is important. The most senior debt tranches will always argue that the valuation of the company should be low (based on business interruption of bankruptcy, industry trends, you name it) while more junior debt tranches will argue that the valuation should be higher (so that they might become the fulcrum security and actually receive recovery). This is why earlier I said that it's not as easy as your MD saying that companies in so-and-so industry typically trades for 7x, so we're going to use that. An argument like that would be torn down in court.
So back to your job as an analyst. Depending on who you represent, you will tailor your valuation to try and support their goals. That's the beauty of restructuring, there are a lot of players in the game (management, banks, hedge funds, etc.) and they all have different goals. Say you're representing the company who has aligned themselves with the senior lenders. Your goal will be to prove that the company should be worth less than it might actually be (all subjective of course, the value it might actually be is unknown). What you will do is prepare an expert report that values the company and is included in the POR as the basis for the recoveries of all the different debt tranches. This expert report will be an extremely arduous and perhaps worthwhile analysis. It is literally the lynchpin of the POR. Eventually lawyers and bankers will argue with competing sides about the value of the company in court and your expert report will be grilled and scrutinized by the other side. They'll ask you (usually your MD or director) why you choose a certain comp. Why did you use this is a discount rate? Why did you use the 20-year treasury instead of the 30-year? Why did you weigh your analysis more towards the DCF and not the precedents? Why didn't you do this or that and so forth. This will happen in court as well as all day depositions. These depositions are not fun for the party being grilled. If your boss is worth their salt as a restructuring banker, they will prepare to the point of paranoia for these depositions. Why? Because if you say something wrong, it will be brought in court that Mr. Your-MD said this, but your other expert you hired said this. Similarly, you will get the valuation report of the competing parties and have the opportunity to comb through their analysis looking for inconsistencies. You'd be surprised how many miscalcs and errors you can find, but often times you will only get a few days to do this. Some sleepless nights will be had. For instance, you might take a look at their comps and be like, hmm, I wonder why they choose to do their valuation as of March 22nd. Oh wait, that appears to be a 52-week high in the market. That's going to skew your comp valuation higher. Or why did they use the proportional method for that comp? Did they even use it correctly?
Like I said, I found that part of restructuring to be extremely analytical and tough, but ultimately really rewarding and interesting. Even to this day, I'll see my expert report for a major bankruptcy referred to in the WSJ, NYT, etc. citing the figures that I calculated. It's kind of cool. So there you have it, a little summary about why restructuring valuation is often more technical, but perhaps not as varied, (in my own opinion) than M&A.
Restructuring analyst interview questions and answers (Originally Posted: 09/08/2015)
Had a good look at old threads and found decent nuggets of information.
Wondering if any can point me in the right direction of a decent guide for Restructuring interviews?
Or if anyone can give me a heads up on the questions/answer for an analyst interview - Particularly for EB/MM firms. Had a look on glassdoor to get a general idea although theres not many reviews on restructuring interviews.
Going to read moyers book too.
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.