PART 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):

• 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.

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.

• 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 briefing. 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.

• Management & governance
• Operational viability
• Financial viability

• 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”

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.

• 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;
• Structures: 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.

• 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.

• 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.

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 firm’s debt capacity, and (v) proposing their solution.

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