The Debt Restructuring School is made up of 2 individually bookable modules

Debt Restructuring School: Module 1 - Early Warning Signals of Loan Default

Debt Restructuring School: Module 2 - Distressed Debt and Restructuring

To read the full course agenda for both modules please click on the individual modules above.

Prior to Attendance

Delegates will have access to the following video clips, which the trainer has developed to introduce important techniques in managing restructurings, completion of which will be necessary for successful completion of Part One (Days One and Two):

Videos

• Managing Multi-Lender Situations, 3 videos with a reviewing time of 10 minutes
• Standstill agreements, 3 videos with a viewing time of 15 minutes
• Independent Business Reviews, 2 videos with a viewing time of 8 minutes

There will also be pre-course reading of case study materials to make the best use of time on the course.

Session Content

Each session deals with a specifically of early warning signal identification and delegates formulate appropriate response strategies;

These will, of course, be driven largely by our perception of the severity of the problem and whether management has fully addressed its root cause;

Agreement to a viable remedial action plan is a matter for negotiation, and we will arm delegates with the techniques to identify their key negotiating objectives and their strategy for achieving these.

Day 1

Introductions and course objectives

Session 1 – Overcoming Challenges from Covid-19

• Discussion on sectors that have been severely negatively impacted by the pandemic;
• Which sectors are likely to recover/over what time period, which sectors are likely to have been permanently disrupted? Remembering, of course, that our customers could be serving the latter even if their own sector appears resilient;
• How have businesses survived thus far? EG., government supports, running down liquidity, cutting discretionary outflows/what could be the impact of any under-investment?;
• Disruption to supply chains; Volatile and rising commodity prices; Global shortages of some key commodities; Short-time working/lack of skilled workers due to Covid absences; Resurgence of inflation in major economies; Changing interest rate environment.

Case study vignettes

Session 2 – Market signals and failure prediction models

• Presentation of market signals that act as early warnings: share prices; bond prices; CDS.
• Presentation of distress prediction models e.g., Altman Z-scores and Moody’s KMV.
• Delegates then apply the learnings to a core case study company, as summarised below:

Case Study

The group is a niche supplier of automotive components to premium original equipment manufacturers. It is a little unusual in that both the parent company and a subsidiary have separate stock market listings. The group has public bonds in place as well as lines from relationship banks, factoring and leasing companies. The group’s difficulties were noticed by the markets just a few months after the most recent bond issue – and several months before Covid-19 had come onto the radar.

What were the causes of the group’s distress? How should the lender’s early

warning systems have identified them? How will each of the financiers view the problems?

Session 3 – Geopolitical Factors

• Presentation and discussion of the geopolitical factors that are disrupting/have the potential to disrupt the firms we finance – and,
• specifically, how they impact the revenues and cost structures of operating businesses;
• Wars e.g., currently in Ukraine;
• Trade wars;
• Economic sanctions;
• Developments in the trading blocs e.g., Brexit;
• Climate agreements

Case Study

A warehouse finance facility has breached its key loan-to-value covenant. What were the global, domestic and firm-specific factors that caused the problem and how should the lender’s early warning system flag these up? 

Should the lender call an event of default and proceed to execute on its collateral? Is this a case where we need to move quickly, or do we have the luxury of time?

What should be our action plan? What are the benefits of issuing a reservation of rights letter? How does the lender’s role an important provider of finance to the sector and its relationships across the value chain impact on our approach?

Session 4 – Input Cost Inflation

• Discussion of developments in commodity prices (oil & gas, electricity; aluminium, steel etc.), global shortages of key commodities, labour force disruption and shortages, the resurgence of wage inflation, and the spectre of stagflation;
• We use our proprietary CVP (Cost-Volume-Pro t) model to identify the firm’s:
  • Degree of operating leverage; Breakeven point; Price sensitivity; Cost sensitivity, and Volume sensitivity;
  • We consider the price elasticity of demand for the rm’s products and the ability to pass on higher costs to customers
  • We analyse whether missed sales are forever lost, or simply postponed.

Case Study

The company is a manufacturer of building materials in MENA. It has approached the lenders for modest, short-term assistance to overcome cash flow disruptions. We now need to enhance our understanding of the causes of the borrower’s difficulties and how these might be resolved in the context of current and future conditions in the global, domestic and sectoral environments.

Would an independent business review (“IBR”) be helpful and, if so, how would we negotiate for the borrower’s cooperation? Are there any aspects of the relationship that might make the lender reluctant to pursue its legal rights?

We discuss: what is meant by an IBR, who conducts it, who pays, how long should take to complete, the topics usually covered and how it can be tailored to the facts of the case.

Day 2

Session 1 – Considering the Request for Waiver

Based upon further information on the Day 1,  Session 4 case study, we follow our proprietary decision tree to decide whether to waive the breach(es) – and what we seek in return. In so doing, we need to evaluate the position of other stakeholders and how they might respond – a high stakes game of chess!

Do we call an event of default and collapse the “house of cards”, or negotiate something less dramatic? How do we assess our potential outcomes from each scenario and select between these?

Case Study

Continuing with the manufacturer of building materials.

Session 2 – Problematic Business Models

• Presentation and discussion of what makes a solid, sustainable business model;
• Examples of restructurings attempted on cases with solid business models, compared to those without;
• Presentation and discussion of how business models are being disrupted in certain sectors and the relative success of incumbents’ responses

Case Study

National retailer of photographic hardware and accessories, with a listing on the junior London stock market. They analyse the external environment using PESTEL, Porter’s Five Forces and SWOT techniques. Delegates identify the early warning signals and root causes, and form their high-level opinion of the probability of a successful turnaround. They then develop their remedial action plans.

Session 3 – Exposure to Large Projects

One of the most prominent, proximate causes of a firm’s distress is taking on a project that is very large and risky compared to its available resources. – in other words, it is “too big to chew”. Sadly, managements have been known in these circumstances to use creative accounting techniques to disguise the developing problem, and this can often morph into fraudulent accounting as the difficulties snowball:

• Presentation and discussion of prominent firms  whose existence has been threatened by problems resulting from large projects and/or the failure of a significant customer;
• Presentation and discussion of the creating accounting techniques that have been used by such rms, including the difficult in understanding the true position of a construction contractor and manipulation of accrued income and the timing of costs

Case Study

A leading, stock market-listed construction contractor based in the GCC: delegates assess the rationales for management’s decisions on an initial public offering and deploying the proceeds on a major expansion of its business. They then follow the firm’s financial progress across a critical four-year period, assessing the relative success of the expansion programme together with identifying early warning signals. They develop a plan for deepening their understanding of the rm’s viability and what they need to do to protect the lenders’ position while this is being undertaken.

Session 4 – Distressed Projects

Following their review of the Chairman’s statement in the rm’s most recent annual review, delegates identify the root causes of the project’s distress together with specifying the early warning signals. In developing their remedial action plan, they will take into consideration:

• The nature of the original construction contract;
• Time and cost overruns;
• Off-spec production;
• Market conditions for supply and demand;
• Import/export incentives and barriers;
• Challenges with negotiating input and offtake contracts;
• Hedging requirements and solutions, and
• What needs to be put in place for the project to achieve viability.

Module 2

After completion of Part One, you will have access to the following video clips, which the trainer has developed to introduce important techniques in managing restructurings that will be necessary for successful completion of Part Two (Days Three and Four):

Videos

• Liquidation & Outcomes Models, 3 videos with a viewing time of 10 minutes
• Case Study: 3-star hotel,4 videos with a viewing time of 13 minutes
• Case Study: Chain of pizza restaurants, 3 videos with a viewing time of 12 minutes

Each of the case study-related series contains short activities which are debriefed within the video series. These activities and the debriefs have been carefully designed to incorporate some of the most important aspects of the anatomy of a successful restructuring.

Day 1

Session 1 – Co-operate or “Go Legal”?

Our decision to proceed to a financial restructuring will depend upon our assessment of the viability of the ongoing business and management’s proposed corrective actions. It will also depend upon the strength of the bank’s exit options.

In this session, we introduce: high-level frameworks for deciding whether to waive/reschedule/restructure/divest/accept haircuts; the “Butler’s Matrix” which helps us understand whether we should adopt an out-of-court approach opposed to a more aggressive realisation/liquidation strategy, and Liquidations & Outcomes models and how these can inform our decisions.

Group Activity: delegates apply these frameworks and models to several of our case studies, reinforcing their understanding of the principles.

Session 2 – Assessment of viability

In this session we provide delegates with the tools to assess which of their distressed borrowers can be returned to viability. Key elements, for which we provide analytical techniques, include:

• Is this a case of business distress, financial distress, or both?
• Whether and how we can overcome the problem of weak management (often cited as the leading cause of distress)?
• Who owns the problem? Are the shareholders still willing/able to support the business?
• Root causes of the distress: if it is in a sector that has been heavily impacted by the pandemic, what are the forecasts for that sector’s recovery? Is this a sector that has been changed forever?
• Market viability
• Product viability
• Competitive viability

Group Activity: delegates review a three-page case study brie ng. They analyse the external environment using PESTEL, Porter’s Five Forces and SWOT techniques. They present to the full team their conclusions on whether and how this case can return to viability. They are encouraged to compare and contrast their thoughts on this case with one of the earlier case studies presented by the trainer.

Session 3 – Assessing viability (part 2)

We extend our analysis of viability from Session 2 to consider:

• Management & governance
• Operational viability
• Financial viability

Session 4 – Forecasting and Sensitivity Analysis in Distress

The trainer provides a refresher on the mechanics for producing financial forecasts, then guides delegates on:

• How to determine the model’s key drivers;
• How to develop robust assumptions for our base case;
• How to create a range of scenarios, by sensitising key assumptions (Best Case; Base Case; Downside Case);
• Deciding which outcomes to focus on as guidance for the design of our restructuring;
• Understanding how to use the different scenarios in our restructuring;
• Applying cost-volume-profit analysis (Breakeven, Degree of Operating leverage, Volume Sensitivity, Price Sensitivity, Cost Sensitivity)
• Useful tools for sensitising in Excel’s “What-if-Analysis” (Goal Seek; Solver; Data Tables, and Scenario Manager) and “Data Validation”

Group Activity: delegates apply Excel tools to sensitise the forecasts for our case study, based upon the assumptions they have developed for “Base/Base/Downside” cases

Day 2

On our final day, we will have firmly in mind the need of delegates to be able to guide their rehabilitated borrowers as they seek to achieve “escape velocity”. We explore structures and techniques that will support the rm’s return to growth while avoiding any risk asymmetries, which might otherwise have the effect of allowing the rm to enjoy benefits of growth and leaving the downside to the bank.

Session 1 – Developing the Financial Restructuring (Part 1)

Having evaluated the strategic and operational restructuring as viable and created our range of forecasts, delegates now consider how to restructure the bank’s exposure. They will develop their proposals following trainer presentation and discussion of:

• Quick wins: use of free cash to paydown debt (alternatively, new equity, assets sales proceeds, working capital improvements); 
• The lender’s restructuring time horizon as a basis for tenor; Matching the structure to the purpose;
• Intructures: fully amortising; part-amortising/part-balloon; bullet; Tailoring to cash flow;
• Use of cash waterfall techniques (involving excess cash capture mechanisms) – otherwise seen in project and leveraged finance; 
• How to structure incentives for borrower performance; How to protect the bank’s position

Group Activity: delegates propose how they would restructure the senior debt and the junior debt of a highly leveraged company in distress. The debrief allows them to compare their proposals with what was actually agreed in real life.

Session 2 - Developing the Financial Restructuring (Part 2)

In this session, we explore how to ensure that the bank achieves an appropriate risk-adjusted return on capital – in recognition of a central tenet of restructuring “that the lenders’ present value be maintained at all times”;

• Higher cash interest rates;
• Interest rate step-ups;
• The innovative use of fees;
• Suitability of “kickers” e.g., royalties, warrants and participation fees
• Situations where debt relief might be appropriate;
• Situations where debt relief is inappropriate;
• Controls required during the restructuring period;
• Financial covenants and other structural protections

Group Activity: delegates first put themselves into the shoes of the private equity owners of the business in understanding the maximum amount of new equity that would be rational from their perspective. They then design reward structures for each of the lenders based upon the principles that: (i) we are entitled to an appropriate return but we should not “kill the goose that lays the golden egg”, and (ii) the absolute priority rule.

Session 3 - Debt-for-Equity Swaps - When to use?

• Positioning such swaps as a last resort rather than liquidation; The key conditions for a debt-for-equity swap;
• The advantages and disadvantages;
• The ways that lenders seek to protect their positions, from equity class (e.g., preference versus ordinary) through to step-in rights;
• The decision on how much debt should be converted for which amount of equity – valuation issues, “old money” being less valuable than “new money”, etc.;
• How to manage the converted equity – examples from international banks

Group Activity: delegates assess whether the junior debt of the Day Four case study would be suitable for a debt-for-equity swap and present their conclusions to the full team.

Session 4 – Final Case Study

Group Activity: delegates draw on the full programme to analyse and propose a restructuring solution for a single plant producer of biodiesel. In so doing, they need to work with summarised forecasts: (i) estimating the DCF value of the assets; (ii) producing a liquidation & outcomes model; (iii) identifying where the value breaks; (iv) estimating the rm’s debt capacity, and (v) proposing their solution.

In the debrief, the trainer will present and explain the actual solution that was designed in real life, then update them as to “what happened next”.

Our Tailored Learning Offering

Do you have five or more people interested in attending this course? Do you want to tailor it to meet your company’s exact requirements? If you’d like to do either of these, we can bring this course to your company’s office. You could even save up to 50% on the cost of sending delegates to a public course and dramatically increase your ROI.

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