Problem Loans & Distressed Debt Restructuring

Course Overview Many lending institutions across the world are still burdened with a high level of actual or potential non-performing loans or other credit exposures. In these situations, lenders need to maximize their recovery rates and optimize their long term returns, subject to prevailing insolvency laws, the lender’s own capital situation and sometimes to the wider interests of other stakeholders in the firm. Specialist knowledge is required to analyse the cause of the borrower’s problems and to design and implement an optimal restructuring solution. These can involve both operational and capital restructurings, including debt for debt swaps, full or partial debt for equity swaps, discounted debt buybacks, equity cures, shareholder loans etc. In some cases, the best outcome may be full or partial asset liquidation. Cashflow forecasting is key to creating an optimal debt restructuring solution and the course covers distressed debt restructuring solutions in Excel. Case studies focus on a range of sectors including property, retail, infrastructure, house building, media and industrial. Methodology The teaching methodology used on this course combines formal theoretical instruction with frequent reference to market data, use of exercises and case studies. Case studies are based on real situations and are designed to help delegates implement new valuation techniques and to learn from empirical experience. Delegates are expected to know how to use Excel at a basic level and should bring a personal computer with them. The course is intended to be practical and interactive, with delegates encouraged to ask questions. The techniques taught to delegates are intended to be of immediate practical use in the workplace.
Day 1 Section 1 Definitions of NPLs and distressed debt Typical causes of distress – sovereign, industrial, cyclical and firm specific Introduction to financial analysis for distressed firms Section 2 Common early warning signs that a firm is becoming distressed Market/economic based signs Income statement/operational signs Cashflow signs Balance sheet signs Acting on early warning signs if there is no covenant breach Should the lender give more time and/or lend more money? Should the lender foreclose? Case study: property/construction firms with early warning signs of distress Case study: cyclical industrial firm with early warning signs of distress Section 3 Analysing the income statement of distressed firms Understanding the sources and sustainability of revenues and earnings Can the firm generate in future sufficient earnings/revenues to service debt? What constitutes interest charges, incl charges for derivatives and quasi-debt? Adjusting for exceptionals, non-core earnings, discontinued items Calculating adjusted margins, EBITDAR and EBITDA interest cover Adjustments for operating leases, joint ventures, minority interests Case study 1a: analyzing the early warning signs in the income statements of HMV, a defaulted retailer Case study 2: calculating underlying earnings of Balfour Beatty, a weak infrastructure company Section 4 Analysing the cashflow statement of distressed firms Identifying warning signs of cashflow shortfalls Can the firm generate sufficient cash to service interest and meet other obligations? Forecasting cash available for debt repayment and cash available for debt service Identifying new sources of cash for debt repayment Cashflow vs asset based lending Payback and debt service analysis Analyzing high growth firms that over-trade and run out of cash Case study 3: analyzing the cashflow statements of firms in distress and in default Section 5 Analysing the balance sheet of distressed firms The nature of the asset base – is the firm worth more as a going concern or liquidated? Balance sheet values versus market and liquidation values Structural subordination and double leverage Consolidation policies – are debt/costs/losses hidden in off balance sheet vehicles? What constitutes debt – including derivatives, quasi-debt and off balance sheet liabilities Adjusting for factored receivables, operating leases, contingent liabilities What other liabilities might crystalise in a default? Liquidity analysis Ratio analysis – leverage, liquidity, asset coverage, working capital, ROIC, ROE, asset turnover Case study 1b: analyzing the balance sheet of weak and distressed firms Day 2 Section 6 Modelling for distressed credits in Excel Introduction to comprehensive forecasting model Forecasting assumptions for the IS, CF and BS What are the key earnings and cashflow drivers for the distressed entity? Tools and key indicators to help with forecasting for distressed firms Covenants - setting revised, cashflow-based covenants and forecasting headroom Structuring cashflow sweeps Scenario analysis – what is required for the firm to turn-around? What could trigger further performance short-falls? Use of liquidation models to assess each stakeholder’s economic interest Case study: Modelling in Excel Section 7 Debt restructuring overview Guidelines from Central Banks Aims of the restructuring for lenders Does the company need additional funding? Rescue vs liquidation, now or later Other liabilities that might crystalise in an event of default What happens to collateral value during a default situation? Dealing with other banks - multi-creditor workouts Preferential claims and ranking of claims   Section 8 Operational restructuring for distressed entities Should this take place before capital structure changes or at the same time? Management – does the firm need new or additional directors? Strategic analysis and new strategy How to maximise cashflow generation Day 3 Section 9 Capital restructuring Potential options & outcomes Option 2 – equity injection, shareholder loan, equity cure Option 3 – amendment of terms PIK, PIK toggle, higher interest, deferred success fees, cash sweeps, extended maturities, additional security, warrants, convertible loans Option 4 – debt restructuring debt for debt swap, discounted debt buyback, full or partial debt for equity swap, lenders sell debt at a discount, engage suppliers in restructuring, cashflow ring-fencing Why restructurings do not always work Return analysis – equity kickers, warrants, compounded PIK returns Case studies Examples of distressed firms that have implemented these solutions Modelling these changes in Excel Section 10 Monitoring distressed and non-performing debt Agreeing forecasts with the borrower Reporting requirements for the borrower Agreeing new Heads of Terms with the borrower Setting covenants and covenant testing Board seats and management influence