IB Prep: What is Banking/Restructuring Questions

Follow up to: How would you adjust the 3 financial statements for a distressed company when you're doing valuation or modeling work? - How do these adjustments differ from public vs private companies?

All stays the same but excess salaries as its much tougher for public companies to manipulate the system like that to pay abnormal salaries.

Advantages and disadvantages of Bankruptcy (Restructuring question)?

Advantages: Could be best way to negotiate with lenders, reduce obligations, and get additional financing Disadvantages: Significant business disruption, loss of confidence from customers, equity investors loose all their money

Advantages and disadvantages of Restructuring (Restructuring question)?

Advantages: Could resolve problems quickly without 3rd party involvement Disadvantages: Lenders are often reluctant to increase their exposure to the company and management/lenders don't see eye to eye

Advantages and disadvantages of Refinancing?

Advantages: Least disruptive and helps revive confidence Disadvantages: Difficult to attract investors to a company on verge of going bankrupt

Advantages and disadvantages of a Sale (Restructuring question)?

Advantages: Shareholders get some value and creditors are less infuriated Disadvantages: Unlikely to gain a good valuation

What do bankers actually do?

Advise companies on transactions, raising capital, connect appropriate buyers and sellers. Day to day is presentations, financial analysis (modeling), marketing materials (pitch books).

Lets say a company wants to sell itself or simply restructure its obligations - why might it be forced into a Chapter 11 bankruptcy?

Aggressive creditors force this to happen if they won't agree to restructuring or can't finalize a sale outside of court, they accelerate bankruptcy by accelerating debt payments

Where did your interest in finance begin?

Anything can work so long as its not a recent answer. Connect interest to internships and clubs.

How would you adjust the 3 financial statements for a distressed company when you're doing valuation or modeling work?

- Adjust COGS for higher vendor costs due to lack of supplier trust - Add back non-recurring legal/other professional fees associated with the sale process - Add back excess lease expenses to Operating Income - CapEx spending is often off (too high its why they are distressed, too low its artificial)

Why would a company go bankrupt in the first place?

- Cannot meet its debt obligations or interest payments - Creditors accelerated debt payments and forced company into bankruptcy - Acquisition has gone poorly or company needs extra capital to stay afloat - Liquidity crunch and company cannot pay vendors or suppliers

How could valuation change for a distressed company?

- Could use the same methodologies most of the time (company comps, precedent transactions, DCFs) - Look more at lower range of multiples and make all the accounting adjustments listed prior - Use lower projections for a DCF and anything else that requires forecasted data because you must assume a turnaround period is required - Pay more attention to revenue multiples if the company is EBIT/EBITDA/EP negative - Look at a liquidation valuation under the company's assets will be sold off to pay debt obligations - Sometimes look at valuations on an assets-only basis and a current liabilities-assumed basis. Need to make bug adjustments to liabilities

Let's say a distressed company wants to raise debt or equity to fix its financial problems rather than sell or declare bankruptcy. Why might it not be able to do this?

- Debt: Sometimes if the company is too small or investors don't believe it has a credible turnaround plan, they will simply refuse to lend it any sort of capital - Equity: Same as above, but worse. Since equity investors have lower priority than debt investors. Plus, for a distressed company getting "enough" equity can mean selling 100% or near 100% of the company due to its depressed market cap

Sometimes a distressed sale does not end in a conventional stock/asset purchase - what are some other possible outcomes?

- Foreclosure - General assignment (faster alternative to bankruptcy) - Section 363 asset sale (faster, less risky version of a normal asset sale) - Chapter 11 bankruptcy - Chapter 7 bankruptcy

Why are you interested in Restructuring?

- Gain a very specialized skill set as work is much more technical. - Broader exposer from getting to see bright and not so bright sides - Better understanding of capital structures and business models that succeed in various areas

The 2 basic ways you can buy a company are through stock and asset purchases. What's the difference, and what would a buyer in a distressed sale prefer? What about the seller?

- In a stock purchase, you require 100% of the company's shares as well as its assets and liabilities (distressed sellers prefer this option to get rid of all liabilities and bc it gets taxed more heavily when selling assets vs entire business) - In an asset purchase, you acquire only certain assets of a company and assume certain liabilities (buyers always prefer this option to avoid unknown liabilities) - Companies use asset purchases for divestitures, distressed M&A, and smaller private companies. Anything large and public is usually purchased via stock

What strategies do creditors have available to recover capital in a distressed situation?

- Lend additional capital or grant equity to the company - Conditional financing: only agree to invest if the company cuts expenses, stops loosing money and agrees to certain covenants - Sale: Force company to hire an investment bank to sell - Foreclosure: Bank seizes collateral and forces a bankruptcy filing

How do you measure the cost of debt for a company if it is too distressed to issue additional debt (investors won't buy any debt from them)?

- Look at yields of bonds or the spreads of credit default swaps of comparable companies. - Could use just the current yields on a company's existing debt to estimate this, but is difficult if existing debt is illiquid

How would a DCF analysis be different in a distressed scenario?

- More of the value would come from the terminal value since you normally assume a few years of cash flow-negative turnaround. - Might do a sensitivity table on hitting or missing earnings projections - Add a premium to WACC to make it higher and account for operating distress

News of distressed companies buying back their debt for 50 cents on the dollar. What's the motivation for doing this and how does it work accounting wise?

- Motivation: Use excess balance sheet cash to buy back debt on-the-cheap and sharply reduce interest expense and obligations going forward. Foregone interest on cash is lower than whatever interest they're paying on debt. Net interest expense is reduced. Get rid of excess cash, cancel out existing debt. - Accounting: Balance sheet cash goes down and debt on the liabilities and equities side goes down by the same amount.

Doing a Liquidation Valuation for a distressed company. Why can't we just use Shareholder's Equity number for this value? Isn't that equal to Assets minus Liabilities?

- Need to adjust the value of assets to reflect how much you could get if you sold them off separately. If you can only recover 50% of the book value of a company's inventory if you tried to sell it off separately. - Shareholders equity IS equal to Assets minus Liabilities, but in a Liquidation Valuation we change the values of all the Assets so we can't just use Shareholders Equity

How would an LBO model for a distressed company be different?

- Purpose is not to determine PE firms IRR, but to figure out how quickly the company can pay off its debt obligations as well as what IRR any new debt/equity investors can expect - Other than that, not much different aside from different kinds of debt (Debtor-in-possession), more tranches, and returns will be lower bc it's a distressed company - One STRUCTURAL DIFFERENCE is that LBO is more likely to take the form of an asset purchase rather than a stock purchase

What options are available to a distressed company that can't meet debt obligations?

- Refinance and obtain fresh debt/equity - Sell the company as a whole or asset sale - Restructure financial obligations to lower interest/debt payments - File for bankruptcy and use it to gain additional financing, restructure, and be freed of contracts

Difference between distressed M&A deal and a restructuring deal?

- Restructuring is one possible outcome of distressed M&A - Solution is not always to restructure debt - "Restructuring" refers to what happens when the distressed company decides it wants to change debt obligations

If the market value of a distressed company's debt is greater than the company's assets, what happens to its equity?

- SHAREHOLDERS' EQUITY goes negative - EQUITY MARKET CAP (shares outstanding*share price) would remain positive as it can never be negative

What happens to Accounts Payable Days with a distressed company?

- They rise - Average Accounts Payable Days go well beyond "normal" because a distressed company has trouble paying vendors and suppliers

Difference between acquiring just the assets of a company and acquiring it on a "current liabilities assumed" basis?

- When you acquire assets, you get just that - When you also acquire current liabilities, you need to make adjustments to account for the fact that a distressed company's working capital can be extremely skewed - "Owed expense" line items like Accounts Payable and Accrued Expenses are often much higher than they would be for a healthy company, so you would need to subtract the difference if you're assuming the current liabilities - Results in a deduction to your valuation

Walk me through the process of a typical buy-side M&A deal

1. Immense research on dozens of potential acquisition targets, multiple cycles of selection and filtering with the company you are representing 2. Narrow list to which companies to approach 3. Conduct meetings to gauge receptivity of each potential seller 4. Conduct diligence to figure out offer price with most likely sellers 5. Negotiate price and terms of purchase agreement

Walk me through the process of a sell side M&A deal

1. Meet with company, create initial marketing materials 2. Send executive summary to potential buyers to gauge interest 3. Send NDAs to interested buyers along with offering memorandum, respond to due diligence Qs from buyers 4. Set a "bid deadline" and solicit written indications of interest 5. Select which buyers advance to the next round 6. Continue to respond to diligence Qs from buyers 7. Set another bid deadline to select winner 8. Negotiate terms of the purchase agreement with the winner

Walk me through a debt issuance deal

1. Meet with the client and gather basic financial, industry, and customer information. 2. Work closely with DCM / Leveraged Finance to develop a debt financing or LBO model for the company and figure out what kind of leverage, coverage ratios, and covenants might be appropriate. 3. Create an investor memorandum describing all of this. 4. Go out to potential debt investors and win commitments from them to finance the deal.

In a bankruptcy, what is the order of claims on a company's assets?

1. New debtor-in-possession (DIP) lenders 2. Secured creditors (revolvers and "bank debt") 3. Unsecured creditors (high-yield bonds) 4. Subordinated debt investors (similar to high yield bonds) 5. Mezzanine investors (convertibles, convertible preferred stock, preferred stock, PIK) 6. Shareholders *****SECURED=LENDERS CLAIMS PROTECTED BY ASSETS OR COLLATERAL

Lets say a distressed company approaches you and wants to hire your bank to sell it in a distressed sale - how would the M&A process be different compared to a normal company?

1. Timing is often quick since the company needs to sell or else they will go bankrupt 2. Sometimes you'll produce fewer "upfront" marketing materials in the interest of speed 3. Creditors often initiate the process rather than the company itself 4. Unlike normal M&A deals, distressed sales can't fail, as they result in either s sale, bankruptcy, or restructuring

$10 million to invest in anything, what would you do with it?

ALWAYS ASK FOR INVESTORS GOALS FIRST: Are they looking to have bug capital gains over 30-40 years?- Well diversified portfolio to minimize risk across sectors not just companies and geographies. Tax-free retirement income?- Municipal bonds might be best. What type of assets?

Want to start any type of business, and had $1 million in initial funds, what would you do?

Ask follow up questions, very general question. Think about a business with high margins that requires little start-up capital or on-going maintenance. Focus on a niche market not dominated by major companies. Explain why this type of business is attractive and how it could grow with minimal future investment.

What is you personal Beta?

Beta=risk (higher beta means high potential return but higher risk). Above 1.0, lower then 2.0.

Two different "sides" of a restructuring deal, which do we usually advise?

Bankers advise either the debtor (the company), or the creditors (anyone that has lent the company money, advise them to get what they can from the company). Do research to see which firm does each

Explain what a divestiture

Company decides to sell of a specific division rather than entire company. Messier than sell-side M&A because valuation of a single part is more difficult. Modeling a transaction structure is complicated.

Explain in simple terms the subprime crisis.

Banks made mortgage loans to people who could not pay them off. Interest rates were at historical lows so borrowing was easy. At the same time, mortgages were sliced up and combined into securities that banks traded, acquired, and sold to investors (one package might contain mortgages given to credible and risky borrowers. Risky=subprime. Could sell saying that even if one part is risky, the rest are credible, so there is still value. Risky borrowers began to default, buyers disappeared, assets sunk to $0. Value of banks dropped and many went bankrupt, all because the packaged securities were so complex no one understood the true risk or value.

Difference between Chapter 7 and Chapter 11 bankruptcy?

Chapter 7: "Liquidation bankruptcy", the company sells off assets to pay creditors. Chapter 11: "Reorganization", company changes terms of its debt, renegotiates lower interest payments, and dollar value of debt (rehab as opposed to chapter 7 death).

Pitch me a stock

Common mistakes: failing to list specific financials, saying how the company stacks up relative to its competition. Structure your answer with these 5 points: 1. Name and basic summary 2. Brief financial overview, how profitable is it 3. State why it is undervalued and more attractive than rivals due to a competitive advantage 4. Long term trend in its favor, why its success will be sustained. 5. Why will the next 5-10 be a prime setting for the company?

How did you value HVLP companies?

Company comparable, precedent transactions, didn't do a DCF

What did you look at in the diligence process for ____ company?

Competitive landscape, differences in amenities/revenue/growth, how they faired against PF

What is your greatest fear about IB?

Do not give a legitimate fear, instead answer with something like: Doing too much deal work and not always seeing them to the conclusion because many things can cause a large transaction to collapse, or having concerns with slow deal flow under poor economic conditions.

What's in a pitch book?

Depends on type of deal, but most common structure is: 1. Bank credentials, similar deals to prove expertise 2: Summary of company's options, strategic alternatives 3: Valuation and appropriate models 4. Potential acquisition targets 5. Summary and key recommendations

What does someone working on an IPO do?

Derive basic financials from a client, meet with bankers and lawyers to draft an S-1 (describes a companies business and markets it to investors.) SEC comments on and makes you revise S-1 until acceptable. Then present company to institutional investors, eventually company begins trading on whatever exchange once enough capital is raised.

Tell me about an M&A deal that interested you recently.

Describe buyer and seller, price and multiples, EBITDA. Discuss deal dynamics, how it developed, implications for the industry. Know the basics.

Starting a laundry machine business, how do you asses whether its viable?

Determine whether you can make a profit. Start with location (the most important part of any retail business), estimate potential customers, how frequently they do laundry (how high is demand?), how much each trip cost. Use this to evaluate profitability and revenue. Regarding expenses, biggest cost is construction and equipment purchases, building maintenance, hiring someone to collect cash, clean, and open/close the building every day. Laundry machines are a very profitable business: labor intensive, do not require much capital after opening. LOCATION IS MOST IMPORTANT (can't go next to an apt building with washing machines).

Talk about a company you admire and what makes them attractive to you?

Do not say something commonly known, go obscure to showcase your research. Give relevant financials if possible. Emphasize important details investors would like: well-diversified customer base, unique competitive advantage, high-margin business model.

Trend in the technology industry or a company that has you interested?

Do research, avoid these mistakes: 1. Describing something not recent or relevant. 2. Don't explain the "why", its obvious a company is shifting to the web because its cheaper. 3. Don't explain the impact on the market as a whole, some companies are growing rapidly, others aren't and traditional business models are failing.

What is the end goal of a given financial restructuring?

Does not change the amount of debt outstanding, but changes terms of debt (interest payments, monthly/quarterly principal repayment requirements, and the covenants.

You have 1$ million but are not allowed to invest it otherwise use it to create money.

Donate to various climate change or _____ fund (oil groups might not like climate change answer)

How are ECM and DCM groups different from M&A or industry groups?

ECM and DCM are "Market based." Tasks are related to staying on top of market/trends and making recommendations to industry and product groups for clients and pitch books.

You are hired as a financial advisor for a company, what value could you add regarding suggested growth and M&A strategy?

Evaluate expansion goals: partnering with a company, expanding with an acquisition, or organic expansion. As a banker, you can leverage your network to provide intros to M&A targets, advise on negotiation strategy, pricing, and managing the entire process.

Tell me a joke

Find an answer

What type of animal or vegetable would you be?

Find my answer

Your name is on the front page of a newspaper one day, what would it be for?

Find my answer: Ambition, creativity, coolness

Do you agree with the $700 bn bank bailout?

Gov't bought toxic assets from banks. Yes I agree, as witnessed with the bankruptcy of Lehman Brothers, if a large enough financial institution collapses, it can ripple and negatively effect the rest of the economy and markets with it to the point of recession. Some Gov't regulation is necessary.

Tell me about the market _____ company was in.

HVLP/VASA: Health and wellness trend had dramatically become more prevalent through the pandemic, and fitness centers more specifically grew rapidly following the end of restrictions. Customers who paid for more expensive memberships following the socioeconomic pressure of recent years dropped down to HVLP gyms that had a cheap base price point with membership levels.

What was unattractive about ____ company you worked on?

HVLP: Generally lacked competitive differentiation (unlike PF), threat of most expensive gyms, no "exclusive" feel, often cannot match trends that boutiques can Stampede Meats: new machinery requires significant cash burn, labor intensive, factories would have to be almost fully remolded and likely find new retail customers.

What was attractive about ___ company you did work on?

HVLP: Low price point and significant amenities, higher quality, easily transformed, generalist, background of a rapidly growing health and wellness trend following COVID. Stampede Meats: space to grow into Sous Vide, diverse customer base as far as retail stores, established distribution and supply chain, but raw meat distribution is extremely low margin as opposed to value added. Hal-Smith Restaurants can be mentioned here.

Why didn't these deals get done?

HVLP: Oak Hill is middle market and many HVLPs do not yet generate enough EBITDA, not a region very comfortable investing in (west coast), financing difficult in 2022. Stampede meats: resistance from executives to transition business operations, valuations from other firms far exceeded ours

Normally M&A processes are kept confidential - why would a distressed company want to announce the involvement of a banker in a sale?

Happens even outside distressed sales to increase number of bids and drive purchase price

Why might a single creditor have to take a loss on the debt it loaned to a distressed company?

Happens to low-priority creditors. Secured creditors come first so other get only what is left an often take a loss

Why are multiple bidders especially important in a distressed sell-side M&A process?

In a distressed sale you have almost no negotiating leverage so the only way to improve price is to have competitive bidders.

Will the adjusted EBITDA of a distressed company be higher or lower than the value you would get from its financial statements?

In most cases it will be higher bc adjustments are for higher-than-normal salaries, one-time legal and restructuring charges, and more

If you own a small business and a larger company approaches regarding acquisition, how would you think about the offer, and how would you make a decision on what to do?

Key terms to consider: Price, form of payment (cash, stock, debt), future plans for the company. Have to weigh each term, there's no magical way to decide. What's important to me (retaining position ay the company)? Market outlook?

Difference between DCM and leveraged fin?

LevFin is modeling intensive, does more of deal execution with industry/M&A groups on LBOs and debt financings. DCM is more closely tied to markets and tracks relevant data.

Economy not in great shape, why choose banking?

Long-term view, downturns happen, all a part of the economic cycle. Might be better to get in on a downturn to gain knowledge of good and bad times. Will not let short-term difficulties deter you from entering the field.

How could a decline in a company's share price cause it to go bankrupt?

MARKET CAP DOES NOT EQUAL SHAREHOLDERS EQUITY. - As a result in the drop of share price, customers, vendors, suppliers, and lenders would be reluctant to do business with the distressed company, so revenue might fall and Accounts payable and Accrued Expenses line items might climb to unhealthy levels - Bear Stearns 2008: Lenders lost confidence as a result of sudden share price declines and it ran out of liquidity

What is a debtor-in-possession (DIP) financing and how is it used in distressed companies?

Money borrowed by the distressed company that has repayment priority and is subject to stricter terms than other financing.

How are restructuring deals different from other types of transactions?

More complex, involves more parties, and are more technical, have to follow certain legal code (might have to work with lawyers), different creditors negotiate with each other.

What would you put in a 1-slide company profile for an investor?

Name of company in header, and divide the slide into 4 equal parts. Top left is business description, headquarters, key executives. Top right is a stock price chart and key financials (forecasted, multiples). Bottom left is a description of products and services. Bottom right is key geographies with a color coded map.

MD makes a mistake, do you correct him as he is presenting?

No, that is very embarrassing, speak if spoken to.

Would you use Leveraged Cash Flow for a distressed company in a DCF since it might be encumbered with debt?

No. With distressed companies it's really important to analyze cash flows on a debt-free basis precisely because they might have high debt expenses.

How does a distressed company select its Restructuring bankers?

Only a few banks have significant experience in this area and the relationships to complete it.

What kind of companies would likely enact debt buy-backs?

Over leveraged companies acquired by PE firms in LBOs during boom years, and now face interest payments they can't meet

Did you do anything quantitative for your internship work?

Peak Frameworks modeling training, Oak Hill L.B.O model, 3-pager condensed model, comps for HVLP gyms. Majority was research.

Tell me about the different product and industry groups at our bank?

Product: M&A, leveraged finance, restructuring, also Equity CapM, Debt CapM...... Industry: Healthcare, retail, industrials, energy, Media and Telecom (TMT).... most BB do not have restructuring

How do companies select the bankers they work with?

Relationships: banks develop relationships with companies over the years prior to them needing anything. Companies call several banks and asks for a pitch.

How much do you actually know about Restructuring?

Restructuring bankers advise distressed companies going bankrupt, bankrupt, or just coming out of bankruptcy to change their capital structure or assist in a sale of the company.

What's your "Plan B" if you can't get into IB?

Something else finance related. Point out any offers you might have to spark interest.

Why should I hire you over the 4.0 from Harvard with a more impressive resume?

Stellar recommendations to back me up, more motivated to succeed and harder working because I don't come from a business focused college. I am able to connect with others and form relationships unlike anyone else, heightened ability to work within a team. He is more qualified on paper, but in banking it comes down to real-world experience .

Riskiest thing you have ever done?

Taft, speaking up against culture and speaking to what a captain should be prior to voting.

Are shareholders likely to receive any compensation in a distressed sale of bankruptcy?

Technically it depends, but practically most of the time no - If a company is truly distressed, the value of its debts and obligations exceed the value of its assets, so equity investors rarely get anything from bankruptcy or a sale

How did you personally contribute to this deal?

VASA: Assisted in pre-work presentation (responsible for mainly competitive landscape and comps, helped associates and team track down membership and pricing analytics, stayed late compiling research and tightening up all expert call notes. Stampede: expert call notes, assisted in 3-pager Hal Smith: Made 3-pager myself, required significant research and CIM studying and creation of simple revenue/costs model with expected multiples.

What kind of recovery can you expect for different assets in a Liquidation Valuation?

Varies a lot by industry but there are rough guidelines - Cash: Close to 100% because it's the most liquid asset - Investments: Varies by how liquid you are, might get close to 100% for ones closest to cash, but significantly less for equity investments in other companies - Accounts Receivable: Less than cash bc too many customers might just not pay a distressed company - Inventory: Less than Cash or Accounts Receivable bc inventory is little use to other companies - PP&E: Similar to cash for land and buildings, less than that for equipment - Intangible Assets: 0%. No one will pay for Goodwill or value of brand name

Do you understand the IB lifestyle?

Yes, I have always had plenty to do and am fine working late hours.