Distressed Debt / Special Situations Modeling Tests
Anyone done this before? Wondering how these would differ from typical LBO tests - trying to prep.
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also interested
Bump interested as well
interested too, would really appreciate any insights, thanks!
in.
in.
Yea, interested as well.
In the absence of someone providing an actual test we could build some assumptions on how that test would differ. I’d be curious to see others thoughts.
My experience in distressed is to always start with liquidation value which brings up the differences between OLV and FLV (orderly and forced) and the net, net value of both. What is the true reality facing the creditors and what can you make them believe? And how can you offer something better? After liquidation value, don’t think much about the creditors who are out of the money.
Then the PE buyer figures out how far deep in the hole the business actually is (lights out, still operating, falling knife, etc), how much emotional damage has been done to all stakeholder parties? Can you turn supply chain, customers and employees back on? What leverage do you have with each party? What's the backlog and how much cash is needed to convert the backlog? Is it a sales or cost turnaround and how will you fix that? Sales TA’s out of distress are really hard in reality. Build your proforma’s to make sure it all makes sense.
Then, what legal structure? How do you flush all the ‘out of the money’ debt without a flurry of lawsuits afterwards? Can you do a friendly foreclosure, a prepacked 11, etc? You can save yourself tens or hundreds of thousands in legal costs with the right strategy and by doing the aftermath legal defense yourself.
Financing; what assets can you leverage for working capital and with whom? Where else can you get money to fund this venture? Then prepare the LOI for the secured creditor(s). For banks, understand how their balance sheet works with reserves and how your new debt might benefit them. Get the LOI signed and hit the gas.
Adding to the list of interested's. Would be valuable to me as well.
I did find a Houlihan Lokey case study but I'm too new to post links, so Google 'Houlihan Lokey case study' if you want to find it (some value). It's not really a modeling test but it has the basics and thesis outlined (replying to above comment since the case study answers the process basically as far as it goes for the company, wouldn't necessary know what would 'show up' on a modelling test). Definitely worth a read, was pretty cool/interesting just in general.
Interested as well.
With the creditors - make sure you know their game. Some folks have in-house guys that can convert their debt-to-equity, credit bit, take board seats with the goal of making their money back and then some.
Other shops don't and are happy just to get out with whatever they can get.
Currently in distressed and have interviewed at several other distressed shops. Fundamentally the LBO doesnt change. What changes is how you effect a control transaction and how the sources and uses work.
I actually almost never run a liquidation analysis in the sense of a TRUE liquidation re: working capital & fixed asset proceeds, admin claims, etc. I will run recovery waterfalls on a going concern value to see value breaks and capital structure/pricing.
The other piece of the LBO is to look at total return of the investment. Taking a view on what a restructuring would look like re: exit facility/take-back paper and how the debt and equity would fair post-reorg.
E.G. you buy into a 2nd Lien and get minimal take-back and equitize most of the tranche there is the quick and dirty... apply a multiple. But if you are a distressed-for-control guy then you theoretically have a view into the post-reorg operational potential of the business and will measure your returns against your initial debt investment (+ potential rights offering)
More on the HF side I'd say the most important analysis are capital structure + quarterly liquidity model/forecast + restructuring napkin math. Looking at current yield, creation multiple, remaining basis at the time of restructuring, what the catalyst for a restructuring is, and what that restructuring looks at
Thanks mate - insightful comments. Thing is, how do you evaluate recovery? E.g. the debt / cash flow in recovery doesn’t play out in line with the theoretical waterfall - how then would you project cash flows / recovery to each debt tranche in a distressed scenario? I imagine there’s a lot of science behind assuming say a 95% recovery on senior debt and 60% recovery on mezz
a lot of that is covered on the Distressed Debt Analysis book by Moyer. Not cheap but really worth it if you're serious about learning more on the space
Would love to learn more
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