About the course
Identify the "red flags" associated with bad credit and key methods of financial restructuring
In many parts of the world, it appears that the economy has not achieved lift-off after the hard-landing of 2008 – sadly, this view is reinforced by the seemingly weekly announcements of another airline failure.
It seems as though the wheel has turned full-circle, with leverage up to pre-crisis highs and credit standards competed down by too many lenders chasing too few good quality borrowers. In certain environments, “covenant-lite” structures are the norm rather than the exception. With increasing trade tensions, the uncertainties of Brexit and geo-political strife, the macro environment is less than ideal.
This programme aims to assist delegates in the early identification of customers’ financial difficulties, facilitating early corrective action.
Where such corrective action is not taken, banks are often faced with a dilemma: enforcing liquidation which can provide relative certainty of a short-term return but which can involve a significant loss of principal, or giving the borrower more time, which adds yet more uncertainty to a risky recovery process. This programme aims to help delegates to steer a course towards successful workouts and restructurings.
The programme is participation focused and structured around case studies from a range of international environments and sectors including: construction contractors; retailers; a restaurant chain; a manufacturer of construction materials; a service business; a producer of biodiesel; an automotive supplier; a manufacturer of rubber products, and airlines.
Introductions and course objectives
Session 1 – Identifying Early Signals (i): Macro factors
Through a review case study vignettes of businesses whose difficulties have been caused, or exacerbated, by changes to the following factors, we draw lessons on how to more effectively monitor our credits and identify early warning signals:
- Trade barriers;• Global commodity prices;• FX rates;• Interest rates, and• Cost price inflation
Session 2 – Identifying Early Signals (ii): Company specific factors
In this session, we continue our aim of earlier identification of the warning signals, but here we focus on company idiosyncratic factors:
- Strategic decisions gone wrong;
- Management’s failure to respond effectively to changes in the competitive environment;
- Inability to fight back against disruptive competition from outside the industry;
- Failure to correctly price contracts;
- Problems with the cost structure, and
- Problems with the capital structure
Session 3 – 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 4 – Case Study: “The Waiver Request”
Delegates work in groups to consider the following problem in relation to a manufacturing company:
- APCO has failed to pay the most recent quarterly instalment of AED 1 million on your term loan. In discussion with the owner, he requests a six-month grace period. Also, he says that payment of the next instalment will be a problem and requests a three-month deferral of this. He believes that both payments can be met by an inter-group loan when a key construction project has been completed and the retention has been released.
- How will you respond?
Session 1 - “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 2 – “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?;
Session 3 – Introducing Decision Frameworks to guide our approach
To some extent, the bank’s inclination towards favouring a supportive, consensual, going concern solution rather than a more aggressive, legalistic approach will be guided by its culture and that of the banking environment in which it operates. In this session, we introduce two decision frameworks that can assist in formulating a rational approach to resolving the problem. Delegates will apply the frameworks to two cases from the trainer’s own experience, suggesting the favoured course of action.
Session 4 – 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 1 – Assessing and enhancing our information base
As senior lenders, often holding security and expecting to be well-treated upon an insolvency, the information we hold on our borrowers is often inadequate for the detailed understanding we require to evaluate a distressed firm’s rehabilitation potential. In this session, we consider:
- What are our information needs?;
- How reliable is the information we already hold – need “forensic” review?;
- Short-term, granular cash flow forecasts;
- Checking our own documentation/ legal review/ problems requiring correction?
- When is it appropriate to require an Independent Business Review (“IBR”)/ drafting the Terms of Reference (i.e. what should we require)/ selecting the consultant/ who pays the fees/ how to gain and retain borrower’s cooperation in the process/ strategic review/ evaluation of management; recommended controls; exit options
Session 2 – Assessing viability of strategic and operational restructuring proposals
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 will conduct such evaluation and analyse the borrower’s cash flow projections, which will be central to the development of the eventual financial restructuring.
Session 3 - Assessing our security and valuing the assets of a distressed firm
- As a Going Concern, including the benefits of tax losses where appropriate
- As a Gone Concern, 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• Real estate assets; Stock exchange securities
Session 4 – IFRS 9
An overview of the new accounting standard and its impacts on how banks go about problem loan resolution. Delegates will work through practical problems of loan provisioning and considering the consequences of new money upon their own bottom line.
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;
- 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 2 – 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 3 – “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?
Session 4 – Returning to the “Good Book”
- Final session centres on when we can consider the borrower to have emerged from distress and be safe to return to the performing portfolio – together with appropriate reporting and corporate governance.
Adrian brings over 30 years’ experience in banking and financial services to a highly interactive approach to training & facilitating learning interventions. Key roles in his financial career included: VP Loan Workout for Lloyds International Corp., New York; Senior Consultant and Team Leader...
Videos and materials
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