Restructuring - Help Understanding The TWCFF
Probably a stupid question, but what are you trying to understand from reading a TWCFF as an advisor, or what things are you specifically looking for? I keep reading that it is fundamental for the restructuring process.
For instance, say I'm a debtor RX consultant and looking at/creating a 13 Wk CF. As the advisor, am I simply seeing where operationally the distressed company runs into cash deficits? Further, at what point do I conclude that the company is out of cash and can no longer operate?
The 13-week cash flow forecast (TWCFF) is indeed a fundamental tool in the restructuring process, especially for distressed companies. Here's what you're trying to understand and analyze as an advisor:
Cash Inflows and Outflows: The TWCFF provides a detailed weekly breakdown of cash inflows (e.g., revenue, collections) and outflows (e.g., payroll, vendor payments, interest payments). This helps you understand the company's liquidity position on a granular level.
Identifying Cash Deficits: As a debtor-side restructuring consultant, you're looking to pinpoint when and where the company runs into cash deficits. This involves identifying weeks where cash outflows exceed inflows, leading to a potential liquidity crunch.
Operational Viability: The TWCFF helps you assess whether the company can continue operating under its current cash flow structure. If the forecast shows that the company will run out of cash within the 13-week period, it signals an urgent need for intervention.
Critical Decision Points: The forecast highlights critical moments where decisions need to be made, such as:
Scenario Planning: The TWCFF allows you to model different scenarios, such as:
Indicators of Insolvency: You conclude that the company is out of cash and can no longer operate when:
In summary, the TWCFF is a dynamic tool that helps you monitor liquidity, identify pain points, and develop actionable strategies to address cash flow challenges. It’s not just about spotting deficits but also about crafting solutions to keep the company afloat.
Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, How to Prepare for Restructuring Technical Questions, Distressed publicly traded credit - case study help needed!, DCF Modeling Course ~ Pre-training text.pdf, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1
This is honestly a good question and I think you’re right on the dot. The TWCF is an advisors way of gauging the runway the company has ahead of a liquidity event (fundamentally it builds from receipt up so really it doesn’t follow accrual accounting under GAAP it is true cash accounting). It sounds 1-dimensional, I agree, but taking a step back, trying to construct a transaction for a distressed company is not easy if the company will run out of cash under either its present capital structure, transaction structuring dynamics, or its new proposed capital structure. Imagine structuring and negotiating a simple forbearance - can the company support interest expense accrual at the default rate at maturity? What about if the advisors are unable to negotiate a deal - how do bankers approach potential DIP lending parties without an understanding of DIP sizing prior to the in court filing to reduce time in Chapter 11? Consider a discounted exchange transaction, how do bankers build confidence in the company’s ability to withstand CODI/AHYDO implications and immediate tax impact of such deleveraging? What about a company with a large ABL (if lenders are concerned about their collateral and “cash collateral” burn out of court) in the background, there are also many lender questions surrounding business AP/AR and internal business performance projections. So for reasons (not limited to the above) I think on the investment banker’s side the TWCFF becomes of practical to transaction structuring. But someone pls correct me if I’m incorrect! Edit: clarity!
Thank you for the input and vote of confidence. I'm interested in confirming the above as well. Though I had posted on the bank forum, I'm fine trying to understand it from a RX consultant's point of view as well if you have any insight there. My understanding, outside of the pure transaction execution, advisor roles (Lawyers, Consultants, Bankers, etc.) tend to mesh in a bankruptcy proceeding.
(Exp. 4+ years in rx co) Agree with the above poster. It is mainly to make sure the company’s cash balance is able to cover outstanding liabilities in a simple way of measuring cash in and cash out over a short period (13 weeks = q1) If you don’t have the cash to pay employees and other major liabilities it will cause litigation and further headaches for management/ BOD who mostly hire rx co to make sure they are not held liable for anything once the company goes under.
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