Can someone explain restructuring from start to finish?
I found the following topic interesting: FROM A LEVFIN BANKER - This Is How An Apollo LBO Deal Works. In the same format as the Apollo LBO, could someone from RX explain usually how a restructuring process works from start to finish?
Company is Worth $300
Company gets a loan with a par value of $200
Company performs poorly and can't meet debt service
Company is now valued at $150
Restructuring Banker is hired and says, "Hey, what if instead of paying your lenders back $200, you tell them their debt is now worth $100, and give them $50 of equity in the company?"
Boom, restructuring is done.
.
You need to read the Houlihan Lokey restructuring case study. It’s available on the internet somewhere
No, sometimes they will restructure the debt in an out of court restructuring if they think the debt will be worth less if they go into ch11. Doesn’t always include equity.
Ex debt is 100, debtor says if they extend maturity and issue new bonds at 80 they won’t have to enter ch11 and can reasonably continue doing business. Creditor might take this if they think they’ll only recover 50% of par from a ch11.
One thing to keep in mind, options and approach changes dramatically based on cap stack, size of co, and geography.
Each individual restructuring is pretty unique, so it's tough to give you a "set in stone" view.
Generally, when a company is having financial issues, they'll have their counsel contact financial advisors and / or investment bankers, the lenders will do the same.
Both sets of advisors will start a diligence process to get up to speed on the situation, company, industry, etc. There will be meetings between advisors and clients, advisors and advisors, advisors and counsel, etc.
At some point, the Company advisors will have a view on what the issues are, how they can be fixed, and what they need from vendors, employees, lenders, other stakeholders to do so. Usually the lenders will wait to see the company plan (lower case "p", not the chapter 11 kind yet).
There are discussions around the plan, if the lenders and other stakeholders go for it, it's usually pretty straightforward from there.
If there is disagreement, there is either some pencil sharpening and continued conversations or the company gets ready to file.
As the company gets ready to file, the company advisors focus on DIP / 13-week cash flows, first day motions and general chapter 11 prep. The company usually goes to some piece of the lender group for a DIP, so the lender advisors will need to analyze and sensitize the DIP budget, covenant analysis, DIP agreement negotiation.
Once the company files its petition, there are first day hearings when the company asks the court for things like being able to use its cash in the normal course, approve a DIP (if needed), pay it's employees, pay it's critical vendors, etc.
Once in chapter 11, the Company has to go to court for approval of everything.
The chapter 11 will run its course, there is a Plan proposed and the impaired classes vote. If the vote passes, the Company eventually emerges and the stakeholders get what they agreed to.
Sometimes restructurings happen out of court, other times in court. In court they can be prepackaged, prenegotiated, or just a free fall. Free fall is a shitshow, so it's not usually the preferred option.
That's a super broad stroke on what happens. As someone mentioned HL has a good case study, a bunch of law firms have primers, it's tough to give you a "perfect" description because things change minute to minute.
Hours-wise there are ebbs and flows, right before filing and right before the Plan are usually heavy, other times there isn't much to do.
On both sides, from an advisory perspective, you're dealing with people who are afraid of losing their jobs and reputations so there is generally a lot of stress. There are instances where creative thinking helps, instances where things are more by the book.
I would encourage you to read the Caesars Palace book if you want to see how shitty things can go.
Thanks, I really appreciate the comment. One question, beside Moyer, HL cases and Caesars Palace, what other books and sources related to RX would you recommend?
This may sound crazy, but I don't find the "theory" to be helpful after a certain level.
Petition is a very good newsletter to hear about what's happening in the space and is a good jumping off point for further research.
Otherwise, I would go through dockets for well known cases. You can see how the gamesmanship works and what types of analysis / arguments are generally used. For this, just try and Google "[DEBTOR NAME] Docket". Omni and Prime clerk are two well known claims agents that do the docket management.
A lot of the restructuring space is knowing what is legal to do, then thinking through precedent and creative possibilities - so it's very helpful to go through the documents.
Student here: Question about the step where they contact advisors and the creditors do the same. What if they plan to max out a line of credit and/or max out inventory from a vendor before they tell their creditors they're in trouble? Guessing the creditors won't let this happen if they know the company is in trouble. I read that troubled companies typically do this to maximize their cash balance going into a bankruptcy, but I'm assuming this is dependent on their chances of actually filing. Would anyone be able to provide some insight into that dynamic when a company is starting to feel some distress?
Creditors/vendors are less likely to allow that as debt will be trading below par, FCFs likely decreasing, butting up against covenants and decreasing share price etc.
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