Restructuring/Distressed Debt Modeling
I've been procrastinating my final exam studying by trying to build a loan-to-own pitch for a (currently) distressed company, but putting together the operating, liquidity, recap, and waterfall models has helped me realize that there is a staggering amount of uncertainty in these situations. Just to scratch the surface, any DIP commitment materially changes forecasted recoveries, the debtor has enough runway to delay filing chapter 11 for at least a year, there's plenty of incremental borrowing capacity in the secured basket, and the creditors are all CLOs (who no longer necessarily become forced sellers theoretically making it more expensive for new investors to accumulate a large position).
My question has two parts:
1. How do distressed-for-control funds get comfortable with all this uncertainty.
2. What type of modeling is done in RX groups? (I've been told that some really only do liquidity analysis, while others seem to do a lot of everything).
*I'm just a sophomore in undergrad so I don't have any RX experience, and this is entirely out of curiosity. Thank you!
Not worked on any Distressed or stressed type of deal yet, so these are preliminary guideposts. I might be off base.
1. There are a few different things to consider here. Hopefully, you’re either good at reading legal documentation yourself or have some of the best lawyers to help you figure out which security will be fulcrum post-bankruptcy emergence. Also, need to understand the broader industry dynamics at play here (what headwinds is the industry of your company facing) and more importantly, what implications can this have from a capital-raise perspective. The dynamics between the different capital providers on the table (pre-bankruptcy equity, first lien, Mezz, etc.) to see who can possibly cause a hold-out issue, what % of each asset class do you need to get buy-in, how bankruptcy-friendly is the jurisdiction where the case is being contested, precedents of prior bankruptcy cases in the same geography or industry (and their outcomes), as well as the financial savviness of the judge, who is presiding over this. Good lawyers, I believe, are key here.
2. I don’t think the modeling in an RX group would be that complicated. It'll be more along the lines of liquidity, covenant, waterfall/recovery analysis. However, you’ll be more adept at understanding the legal nuances of a transaction than your counterparts in coverage groups. I am not sure how much distressed M&A has happened over the years, so I am willing to wager that there isn’t a lot of your cookie-cutter merger modeling happening. Even if it is, merger modeling isn't complicated to begin with. By legal documentation: rights of each claimant, whether the assets on a HoldCo or OpCo level.
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