Restructuring Problem Credits

The purpose of this course is to identify the key analytic, structuring and restructuring lessons to be learned from deteriorating/failed credits. This is a highly interactive course where case studies and exercises are used to reinforce key learning points.

Key Learning Outcomes:

• Understand the role of covenants in credit management and crisis situations
• Understand the process for managing exposures to a company in distress
• Discuss the business and operational decisions required in order to place its business on a more solid foundation
• Assess the available options to lenders / investors, compare likely recovery against other alternatives and the current market price of the company's debt, where applicable
• Identify the restructuring alternatives, evaluate the possible choices and select the most appropriate restructuring solution, exit and/or workout options for companies in distressed situations.

Debt Structure

Introduction / revisit the four-step analytical approach and evaluate the strengths and weaknesses of debt structures in protecting lenders / investors when a company reaches crisis point.

• Purpose: identify the borrower and where the assets and cash flow are
• Risks: macro, sector, business and financial, management and owners
• Debt profile: amount, currency, tenor, drawdown and repayment
• Ranking: legal, structural, and effective
• Covenants: predictive qualities of standard leverage loan covenants
• Credit pricing and recovery rates.

Crisis Management

Managing exposures to a company in distress: the short term crisis management and the medium term business revisions required to manage the situation.

Triggers to distress

Covenant breach

Liquidity crunch / Refinancing difficulty

Insolvent trading:

• Defining insolvency
• Jurisdictional considerations

Exercise: Covenant breach and actions taken

Managing crisis

• Management response to covenant breaches
• Exercise: Exchange offers
• Options for lenders
• Potential parties to a restructuring
• Appointment of external advisors
• Cash management
• Majority decision issues
• Establish and certify the company's going concern status

Legal framework

Insolvency regimes

• Responsibility of directors
• Recovery rates

US models: Chapter 11 (reorganisation) and Chapter 7 (liquidation)

Exercise: Impact of Chapter 11 on Global companies

Overview of EU Insolvency Regulation

• Establishing centre of main interest (COMI) and secondary proceedings
• Summary of insolvency procedures in UK, Germany, France, Spain

Exercise: Jurisdiction selection for insolvency proceedings.

Remedial Business Plan

Evaluate the key business and operational decisions required by the company in order to place the business on a more solid foundation.

• Identify underlying cause for the need to restructure
• Over indebtedness
• Operational issues
• Determine a sustainable EBITDA
• Assess viable level of debt
• Overview of valuation methods: multiples, discounted cash flow or asset valuation
• Obstacles to restructuring.

Debt Restructuring Alternatives

• Examine the available options, compare likely recovery against other alternatives and the current market price of the company's debt, where applicable

Exit Options for the Lender

• Sale of exposure, hedge (CDS, credit insurance)
• Negotiate: waive covenants, debt / equity swap, debt / debt swap, amend and extend
• Accelerate: enforce, bankruptcy filing

Distressed Valuations

• Cost of financial distress
• Cyclicality on firm values

Illustration Case Study:

Identify the pros and cons of the restructuring options presented.

Quantify potential recovery for creditors

• Relative claims and negotiating positions creditors
• Stakeholders with special negotiating positions
• Claims are not pro-rata
• Intercreditor agreements and terms
• Impact / influence of distressed / vulture funds on restructuring alternatives
• Cram down rights: forcing confirmation of a plan over the objections of dissenting classes e.g. shareholders with voting rights.

Final Case Study:

Participants will work in groups to apply the key concepts learned during the two-day workshop and apply these to a real restructuring situation.