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Early Warning Signals, Distressed Debt & Restructuring

Identify the "red flags" associated with bad credit and key methods of financial restructuring
  • Programme objectives

    By the end of this programme, delegates will:
    • Be able to recognise early warning signals arising from global, domestic, sectoral and firm-specific factors as well as market signal s and failure prediction models;
    • Be able to identify the most common forms of creative and fraudulent accounting, and make appropriate adjustments to reflect a truer view;
    • Be able to develop action plans aimed at protecting the lender’s position and restoring the borrower to the good book;
    • Be able to develop “Plan “”, “Plan B” and “Plan C” – with the first two being variants on going concern restructurings and the latter involving execution against collateral and/or insolvency;
    • Understand the circumstances where a reservation of rights letter should be issued;
    • Be aware of the need to enhance the lender’s information base and how this might be achieved via an independent business review, including the challenges with this intervention;
    • Understand that the decision on whether to enforce needs to be taken into the context of the relative strengths and wishes of other key stakeholders;
    • Be able to conduct a structured approach to exit analysis, leading to a conclusion on which option is likely to deliver the highest present value to the lender;
    • Appreciate the weakness of “extend and pretend” solutions, amounting to “kicking the can down the road” and how these can be avoided;
    • Develop a clear view on the components of a successful restructuring;
    • Be able to reach balanced judgements on whether to provide new money;
    • Be able to state the purpose of a standstill agreement, its key provisions and the challenges in participating in such agreement;
    • To be aware of the components of a structured assessment of the firm’s viability and be able to apply this to practical problems;
    • To be able to develop a financial restructuring proposal based upon the borrower’s ability to pay;
    • Understand the need to enhance the lender’s return and be able to identify techniques for this;
    • Be able to set negotiating objectives for a complex restructuring.

  • This course will take place using video conferencing technology. To find out more please contact learning@euromoney.com

    The course will be run as a fully interactive virtual course, and be divided into 3 distinct 2 hour sessions each day, starting at 9am BST (British Summer Time)

     

    Day One

     

    Introductions and course objectives


    Session 1 – Warehouse financing problem (part one)

    From identification of early warning signals to action plan
    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?

     

    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?

     

    What should be our action plan? What are the benefits of issuing a reservation of rights letter?

     

    Session 2 - Warehouse financing problem (part two)

    Enhancing our information base and the independent business review
    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.

     

    Session 3 – Distressed automotive component producer (part one)

    Market signals and failure prediction models as viewed by the lenders
    The group is a niche supplier 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? Discussion of market signals: share prices; bond prices; CDS. Discussion of distress prediction models: Altman Z-scores and Moodys KMV.

     

    How will each of the financiers view the problems?

     

    Session 4 – Distressed automotive component producer (part two)

    Forming the decision on whether to grant a waiver
    The group is projecting that it might have difficulty in meeting committed debt repayments. It has announced the commencement of a disposal of the subsidiary and claims that, when completed, this will solve the liquidity problems. It claims that it has been successful in obtaining deferrals from its relationship bankers.

     

    However, how will the bondholders see things? We investigate the differences in protections enjoyed by each issue and proceed to group work to consider the negotiating objectives of each.

     

    Call an event of default and collapse the house of cards, or negotiate something less dramatic?


    Day Two


    Session 1 – When “Window Dressing” leads to Fraudulent Accounting

    As businesses become increasingly distressed, they appear more likely to utilise accounting manoeuvres that present their financial statements in a more favourable light. Unfortunately, the situation can quickly get out of hand, with creative techniques used in an earlier period needing to be expanded upon in later years until the statements become misleading.

     

    In this session, we assist delegates in identifying situations where such techniques are being used and explain what analytical adjustments need to be made to avoid becoming victim to these “games”:
    • Inappropriate application of accounting policies, leading to premature recognition of revenues;
    • Switching costs from a failing project to hide losses;
    • Inappropriate capitalisation of costs;
    • Failure to recognise that an employer will not agree to pay under change orders;
    • Failure to recognise the true costs of the business through the application of aggressive depreciation and inventory valuation policies;
    • Failure to take provisions against delinquent debtors and slow-moving/obsolete inventory;
    • Use of special purpose vehicles and other techniques to avoid disclosure of debts;
    • Use of securitisation and supplier finance structures that give a distorted view of the balance sheet and cash flow statement

     

    Case study: A failed GCC construction contractor


    Session 2 – “Exit Analysis”

    While a bank’s “Plan A” and “Plan B” are likely to be going concern solutions, we do need to evaluate whether these are likely to produce the highest present value of recoveries. “Plan C” typically involves execution against collateral, which might involve a formal insolvency process.

     

    In this session, we will explore liquidation & outcomes models and their use in restructurings. Central to this analysis will be an understanding of:
    • Going concern value of the firm, including the benefits of tax losses where appropriate
    • Gone concern value of the firm, e.g. liquidation values
    • Discounted cash flow techniques and when to use levered (as opposed to unlevered) beta and adjusted PV
    • Relative value; choosing comparables; Valuing each component of the capital structure• Looking for real options
    • Valuation of real estate assets, and
    • Valuation of intangible assets

     

    Practical: the course director guides delegates through a desk-based update on a valuation of a mixed use building. Delegates will be able to identify the key valuation drivers and arrive at perhaps more realistic conclusions as to likely value.


    Session 3 - “Anatomy of a successful financial restructuring”

    This session leads to the presentation of two financial restructurings from the trainer’s own experience, which delegates are asked to evaluate and suggest what might have been done differently. In so doing, delegates will receive a high-level understanding of key restructuring principles:
    • Problem diagnosis;• The need to improve our information base;
    • The dangers of “Extend and Pretend”;
    • The need for restructurings to be fully integrated, with the financial restructuring being tailored to and conditional upon appropriate strategic and operational changes within the borrower’s business;
    • Evaluation of exit options;
    • The importance of and type of controls during the key stages of the restructuring

     

    Session 4 – “Understanding our role in the restructuring”

    This session is structured around a case study entitled: “New Money – throwing good after bad?”. Trainer encourages delegates to take an holistic view of the borrower’s financial structure in order to understand the strengths and weaknesses, opportunities and threats from our position:
    • Nature of the borrower – independent legal entity or group member?;
    • Owners/ sponsors – our wider relationships, their influence, their ability willingness to provide ongoing support to the borrower;
    • Our view of management;
    • Borrower’s short-term proposals;• Senior or junior debt provider?;
    • Extent of security provided to lenders;• Do we/ other lenders have self-liquidating facilities?;
    • How are the borrower’s key suppliers acting?;
    • Considering whether to enter into a formal forbearance/ standstill agreement;• Additional finance required to continue operating during restructuring?;


    Day Three

     

    Session 1 – Multi-Creditor Workouts

    • The problem of multiple banks & non-banks competing against each other on the basis of “whoever shouts loudest gets paid first”;
    • Frameworks for cooperating: The London Approach and the INSOL 8 Principles;
    • Co-ordinating committees: when these are appropriate/inappropriate, the “do’s and don’ts”;
    • Standstill agreements: how to structure with built-in success milestones;
    • The use of external consultants;
    • What should be delivered within the independent business review (“IBR”)


    Session 2 – Assessing viability of strategic and operational restructuring proposals (part 1)

    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. In this session we provide an overview of the key elements of viability assessment:
    • Market viability
    • Product viability
    • Competitive viability

     

    We illustrate each with short activities, drawn from successful and unsuccessful restructurings in a range of sectors and jurisdictions. This analysis continues into Session 3.

     

    Session 3 – Assessing viability (part 2)

    • Management & governance
    • Operational viability
    • Financial viability

     

    Session 4 - Practical session: viability assessment of core case study

    Delegates apply the learnings from the previous session to the core case study. Armed with a strong appreciation of how the business model is designed and the associated SWOT, this will assist us in deciding whether to support the firm with a going concern restructuring.


    Day Four


    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 firm’s return to growth while avoiding any risk asymmetries, which might otherwise have the effect of allowing the firm to enjoy benefits of growth and leaving the downside to the bank.

     

    Session 1 – Developing the Financial Restructuring

    Having evaluated the strategic and operational restructuring as viable, delegates now consider how to restructure the bank’s exposure. They will develop their proposals following trainer presentation and discussion of:
    • Tailoring to cash flow;
    • Use of cash waterfall techniques (involving excess cash capture mechanisms) – otherwise seen in project and leveraged finance;
    • How to structure incentive for borrower performance;

     

    Session 2 - Ensuring the bank achieves an appropriate risk-adjusted return on capital;

    • Suitability of “kickers”;
    • 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

     

    Session 3 – Restructuring negotiation exercise

    Delegates are divided into two groups: one group acts as bankers, the other acts as finance directors. The objective is to negotiate a financial restructuring of the core case study company.

     

    Each group is briefed separately by the trainer on how their performance will be evaluated – with marks being awarded for attaining certain outcomes. This assists in giving direction to the negotiations.

     

    Session 4 – “What happened next…?”

    Trainer leads delegates through what happened in real life and why. Delegates reflect on the quality of their proposals and those that were negotiated in practice. What could have been done to enhance the bank’s return?
  • 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.

    If you want to run this course at a location convenient to you or if you want a completely customised learning solution, we can help.

    We produce learning solutions that are completely unique to your business. We’ll guide you through the whole process, from the initial consultancy to evaluating the success of the full learning experience. Our learning specialists ensure you get the maximum return on your training investment.

  • We have a combined experience of over 60 years providing learning solutions to the world’s major organisations and are privileged to have contributed to their success. We view our clients as partners and focus on understanding the needs of each organisation we work with to tailor learning solutions to specific requirements.

    We are proud of our record of customer satisfaction. Here is why you should choose us to help you achieve your goals and accelerate your career:

    • Quality – our clients consistently rate our performance ‘excellent’ or ‘outstanding’. Our average overall score awarded to us by our clients is nine out of ten.
    • Track record – 10/10 of the world’s largest banks have chosen us as there training provider and we have delivered training across the largest banks and have trained over 25,000 professionals.
    • Knowledge – our 100+ strong team of industry specialist trainers are world leading financial leaders and commentators, ensuring our knowledge base is second to none.
    • Reliability – if we promise it, we deliver it. We have delivered over 25,000 events both in person and online, using simultaneous translation to delegates from over 99 countries.
    • Recognition – we are accredited by the British Accreditation Council and the CPD Certification Service. In an independent review by Feefo we scored 4.2/5 on service and 4.7/5 on Coursecheck
This course can be run as an In-house or Tailored Learning programme

Instructor

  • Adrian Grant

    Biography

    With more than 30 years’ experience in banking and financial services, Adrian specializes in delivering practical and interactive training programmes in the areas of credit, origination, corporate restructuring, financial analysis, and loan workout up to an advanced level. Before becoming a trainer and consultant, he worked as a regional director for the National Australia Bank Group’s corporate and institutional banking division.