Restructuring technicals

Why Miller Buckfire?

- Well I'm going to work in IB, and among the different types of work, restructuring is what I want to work on - When it comes to restructuring shops, Miller Buckfire is one of the best - fairly small team, but you all work on great interesting deals, and I'd want to learn from your experienced professionals - both corporate stuff and government stuff which I think would be fascinating - hire well and I'd love to surround myself with smart and ambitious people

restructuring valuation

- comps, precedent transactions, DCF (unlevered cash flow), liquidation valuation - only use EV multiples, because equity multiples won't paint the full picture - use leverage an coverage ratios

Why is debt cheaper than equity?

1) Interest expense is tax-deductible, (hence the (1-tax rate) in the WACC formula) 2) Debt is senior to equity in the cap structure (so in a bankruptcy liquidation debtholders would get paid off first) -- Intuitively, the cost of debt (interest rates) is lower than the cost of equity (which is often around 10%+), so debt will lower WACC

Bumble Bee Foods ch 11 deal

1) San diego based canned seafood producer - known for their tuna 2) legal challenges - pleaded guilty to a price-fixing scheme - which I thought was interesting 3) Taiwan-based FCF Fishery (largest creditor) has agreed to purchase its assets for roughly $925 million.

what do restructuring IB analysts do?

1) advise companies (debtors) on deals to modify their capital structures so that they can survive, they may advise the creditors 2) work on bankruptcies, liquidations, and distressed sales

Argentina debt restructuring deal

1) agreed on a deal to exchange 99% of the bonds involved in a $65 billion restructuring - defused a messy default - economy is one of the largest in S. America, and its struggling + w/ COVID its been really struggling 2) the country was relieved of $37.7 B worth of interest over the next decade

Chapter 11 Bankruptcy

1) allows the firm the opportunity to reorganize its debt and try to reemerge as a healthy organization. 2) protects an insolvent firm from creditors during a period of reorganization to restore profitability

stressed companies' options

1) divestiture 2) spinoff 3) tracking stocks 4) equity carve out

Why Restructuring?

1) mixture of finance, law, and psychology - at tufts, since its a liberal arts school, I have to take a certain amount of non-major courses. And i love taking diverse courses including the law-focused courses I've been enrolled in. 2) more appealing to me than simple m&a advising for industrial companies - one space where I have the most room to learn - I love the game theory aspect of restructuring IB - i like aligning incentives 3) creativity. deals are inherently different, and different problems require different solutions 4) and at Miller Buckfire, I like the idea of both working on corporate and government type deals

impairment (asset)

1) permanent reduction in the value of a company's asset, typically a fixed asset or an intangible asset - When testing an asset for impairment: 1) the total profit, cash flow, or other benefit expected to be generated by that specific asset is periodically compared with its current book value. 2) If book value > future cash flow or benefit of the asset, the difference between the two is written off and the value of the asset declines on the company's balance sheet

types of companies (debtors) that seek restructuring IB

1) stressed 2) distressed 3) bankrupt

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

cash coverage ratio

(EBIT+Depreciation)/Interest expense

where do you see future distress?

1) as far as industries go: retail - COVID accelerated what I think is an ongoing process, and that is the end to traditional retail as we know it - either amazon swallows up retail itself, or companies follow the amazon method of online shopping and shipping, but either way, I think retail will be scaled back over the next 10 years 2) also watching in particular, movie theaters. - COVID has battered theaters and more content producers are leaning toward subscription based services

signs that a company is ripe for restructuring

1) debt trading levels 2) near term maturities 3) liquidity 4) leverage 5) negative EBITDA 6) stretched payables 7) a decrease in credit rating

Chapter 7 Bankruptcy

1) past the stage of reorganization and must sell off any nonexempt assets to pay creditors. 2) Creditors with secured debt claims are prioritized over those with unsecured ones -- often called "liquidation" bankruptcy

leverage ratios

ratios that measure the extent to which a firm relies on debt financing in its capital structure 1) debt/EBITDA 2) debt/equity

coverage ratios

ratios that measure the firm's ability to pay certain fixed charges 1) interest coverage 2) cash coverage 3) asset coverage

restructuring

redesigning an organization so that it can more effectively and efficiently serve its customers

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange 1) current ratio 2) quick ratio

par value

the face value of a bond. -- important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. NOTE: The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond's credit status

Equity carve out (ECO)

Action where a firm separates out assets or a division, creates shares with claims on these assets, and sells them to the public. Firm generally retains control of the carved out asset.

Interest Coverage Ratio

EBITDA / Interest Expense

What is a common form of interest for distressed companies besides cash interests? and give $10 of this, how is this reflected in the financial statements?

Payment-in-kind (PIK) interest is quite common for distressed companies as it reduced cash interest expense. IS: because PIK is a form of interest, pre-tax income falls by $10. and assuming a 40% tax rate, net income falls by $6. CASH FLOW: net income is down $6, but you add back $10 since PIK is a non-cash expense. So cash is up by $4. BS: cash is up by $4 on the assets side. retained earnings in the owners equity section falls by $6. and you add $10 of new debt to liabilities (due to the PIK).

capital strucutre

The capital structure is how a firm finances its overall operations and growth by using different sources of funds. an optimal capital structure results in the lowest WACC

WATERFALL Q: If we have EBITDA = 40M, EV/EBITDA = 5X, senior secured debt of $150M, & unsecured debt of $100M, what is the value of equity & the value of debt if ch. 11 is imminent? where would the unsecured debt trade?

What do you know: 1) EV = 40M*5 = 200M 2) senior secured debt is covered before unsecured in bankruptcy in ch. 11: 1) the $200M of EV will cover the $150M of secured debt. -- so, this'll trade normally, at full value. 2) This leaves $50M of EV to cover the $100M of unsecured debt. -- which'll give this class of debt 50% recovery. -- This means this debt will be impaired in the ch. 11 and reorganized -- with 50% recovery, you'd expect the unsecured debt to be trading around 50, but doesn't necessarily mean it does -- the Unsecured debt will be the impaired class in the eventual Chapter 11. They will therefore be the class who can vote on a plan of reorganization (POR) and will get the reorganized equity of the company as compensation for the impaired nature of their holdings. -- you'd expect it to be above 50 due to the distributive allocated equity from the POR

debtor in possession (DIP)

a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations during a ch. 11 proceeding

Philosophically, what are assets and liabilities? what about for distressed companies?

assets generate cash, liabilities strip cash away. For a distressed company, something kind of strange happens: assets suddenly are deemed to have less capacity to generate cash - directly or indirectly - in the future, while liabilities strip away roughly the same amount of cash directly or indirectly.

Liquidations

break up the firm and sell assets

impaired debt

debt that the borrower is unlikely to be able to repay in full to the lender on its maturity date as the borrower is in financial trouble or in a form of insolvency

two-sides of restructuring

debtor and creditor advisory

a distressed company

has already defaulted by missing an interest or principal payment or maturity, or has violated a covenant (such as a minimum EBITDA / Interest requirement)

a stressed company

is still able to pay interest on its debt, but it may have trouble with an upcoming maturity or may be heading toward a cash crunch.

asset coverage ratio

measures the ability of a company to meet its outstanding debt obligations with its assets (total asset - intangible assets - current liabilities - short term debt) / interest expense

plan of reorganization (POR)

outlines how the debtor will pay back creditors over time. In order to move forward with the plan of reorganization, the creditors must accept it and the court must confirm it

Asset write-down

restructuring activity where long-term assets or unsalable inventory is reduced in value in the company financial reports

seniority of capital structure (lowest risk and cost to highest risk and cost)

senior debt (secured then unsecured) subordinated "mezzanine" debt hybrid financing preferred stock common stock

creditors goals in restructuring

try to get them the best possible terms, which might mean the highest recovery (repayment percentage) possible

leverage ratio = 5 and coverage ratio = 5. What's the interest rate (r)?

we know: 1) leverage ratio = debt/EBITDA = 5 2) coverage ratio = EBITDA/Interest expense = 5 3) (r)*debt = interest expense Substitute and plug in: 1) coverage ratio = EBITDA/(r)(debt) = 5 2) 5(r)(debt) = EBITDA 3) 5(r) = EBITDA/Debt -- this is the inverse of the leverage ratio 4) 5(r) = 1/5 5) divide both sides by 5: (r) = 1/25 = 4%

bond trading (par value vs interest rates)

when interest rates are low, a larger proportion of bonds will trade above par or at a premium. When interest rates are high, a larger proportion of bonds will trade at a discount

Bankruptcy

A legal process to get out of debt when you can no longer make all your required payments

Recapitalization

Changing the capital structure of a corporation by issuing, converting, or redeeming securities.

asset write-down of $10 on financial statements

IS: operating income is down $10 pre-tax and assuming a 40% tax rate, net income is down $6. CASH FLOW: net income is down $6, but an asset write-down is non-cash, so we add back $10 making cash up by $4. BS: cash is up $4, but the actual asset in question (say PP&E) is down by $10, so the asset side of the BS is down $6. Nothing occurs in liabilities, but the SE is obviously down by $6 as net income flows into retained earnings.

liquidation valuation

Valuing a company's assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive

Secured vs. Unsecured Debt

Unsecured debt has no collateral backing Secured debts are those for which the borrower puts up some asset as surety or collateral