Problem Loans: Financial Restructuring/Corporate Recovery

Course Overview The 2008-09 global financial crisis highlighted the need for systematic approaches to the resolution of problem loans and other credit assets. This 4-day course provides necessary practical skills to evaluate the principal causes of a firm’s financial distress, and identify possible resolution alternatives for credit exposures. The course will: Outline a “situation audit” framework to discern whether or not the distressed credit is in trouble due primarily to underlying fundamental problems or to excessive financial leverage (or a combination of both) Provide practical exposure to the understanding of a troubled firm’s existing hierarchy of claimants, as well as its future debt capacity, including Debtor-in-Possession (DIP) financing Examine potential opportunities to make operational and organizational changes – independent of the impaired capital structure or the claims hierarchy – that can improve financial condition and future performance Highlight the process of restructuring the existing hierarchy of outstanding claims against a distressed firm’s assets Review enterprise valuation methodologies, generally necessary for attribution and allocation of the firm’s value among a reconfigured claims hierarchy Identify strategic changes, such as major asset sales or selective re-leveraging, that are often necessary for recovery of value Profile the emerging world of distressed debt investors, as such investors can be adversaries of conventional creditors in the restructuring process Methodology As with all Euromoney Training courses, this programme makes use of case-studies and exercises to ensure that you leave the course, ready to apply your new knowledge. Who should attend This course is designed for any professionals involved in the analysis and resolution of problem credits or troubled assets: Investment bankers Sell-side securities analysts Buy-side portfolio managers Sovereign wealth and pension fund analysts Corporate credit and financial staff Corporate planners and strategists Credit analysts Accountants and lawyers working with distressed clients and transactions Supporting publications:
Topic 1: Situation Audit – Integrating Business and Financial Strategies Firms get into financial trouble because of poor business performance, often exacerbated by an unsustainable capital structure. Diagnosing the most important source of stress – business weakness or capital structure – is a critical first step in restructuring. Business Stresses Sector Sector consolidation or excessive capacity New competitor entry or heightened rivalry from existing competition Long-term sector problems: Product obsolescence, competitiveness Firm-level Product/service problems Obsolescence Excessive product offerings or SKUs Weak distribution or lack of pricing power Costs Lack of discipline and competitiveness Unhedged cost exposures Insufficient R&D spending Assets Poor working capital management Insufficient capital spending and investment Labor Collective bargaining issues Lack of ability to hire, develop, motivate, and retain talent Agency problems: Self-seeking, unethical, or illegal management behavior Fraud: Aggressive or fraudulent accounting or representation Financial Stresses Asset/Liability Mismatch: Short-term Assets funded with Long-term Liabilities Excessive short-term debt vs long-term debt Excessive floating rate vs fixed-rate debt Foreign currency mismatch Inappropriate Capital Structure: Excessive debt Excessive dependence on one kind of debt: bank debt, bonded debt Excessive dependence on one source of debt: banks, bond investors Non-interest Bearing Liabilities Pension or post-retirement healthcare liabilities Tax liabilities Legal judgments or penalties: product recalls, worker compensation Contingent claims: Derivatives Contracts, Warrantee liabilities Case Firm: Transportation Displays (A), with Excel model Topic 2: Financial Claims and Capacity Assessment When firms experience financial distress, creditors and other stakeholders have to develop a strong understanding of the existing hierarchy of claimants, as well as the future debt capacity of the firm. Claims Hierarchy Secured claims: secured bank debt and mortgage bonds Superpriority claims: D-I-P financing Priority Claims Restructuring professionals: Legal, accountingo Wages, salaries commissions Employee benefit claims Alimony/child support Customer deposits Tax claims General unsecured claims: Unsecured debt, trade creditors Preferred stock Common stock Jurisdictional Differences: U.S. bankruptcy law vs. UK, European law Debt Capacity Forecasted income statement Revenues, costs, margins Forecasted cashflow statement Working capital needs, capital expenditure Free cashflow generation vs existing claims: interest, principal, other Forward-looking debt capacity Case Firm: Transportation Displays (B), with Excel model Topic 3: Restructuring Options - Operational and Organizational When firms experience financial distress, often there are opportunities to make operational and organizational changes – independent of the impaired capital structure or the claims hierarchy – that can greatly improve financial condition. Operational Restructuring Options SKU “editing” and product-line “trimming” Process redesign: Streamlining operational processes to improve productivity Cost reductions: Procurement and supplier consolidation, labor rates, overhead, R&D, maintenance – “zero-based budgeting” Elimination of redundant capacity and staff and plant and office consolidation Reduction of capital outlays Shift of production to lower-cost jurisdictions Outsourcing of non-critical functions: IT, security, transportation Common IT infrastructure Organizational Restructuring Options Redrawing divisional boundaries Flattening hierarchies, reduction of management layers Revising compensation, especially sales compensation Changing business unit structures and reporting responsibilities – increased P&L accountability Revised performance measurement schemes More frequent, more intensive management oversight, e.g. weekly sales calls Change of pension benefits Reduced use of ex-patriots New Leadership from Outside the Firm Case Firm: Transportation Displays (C), with Excel Model Topic 4: Restructuring Options – Operational Financial Changes When firms experience financial distress, often there are opportunities to make changes in the operational fnancing of the firm – again, independently of the impaired capital structure or the claims hierarchy – that can greatly improve financial condition. Short-Term Balance Sheet Management Options Accounts Receivable: More aggressive collections Inventories: Reduction Prepaid Expenses: Reduction Accounts Payable: Expansion Accrued Liabilities: Expansion Topic 5: Restructuring Options – Changes in the Claims Hierarchy and the Nature of the Claims Firms experiencing financial distress will almost always have to restructure the outstanding claims against their assets, and often the very nature of those claims themselves. Financing Alternatives: Debt Introduction of DIP financing Extension of Debt Maturities Increased or Decreased Coupons Reduction or “zeroing” of junior claims Shift to PIK or partial PIK interest instruments Debt-for-Debt Swaps Debt-for-Equity Swaps or Introduction of “Equity Kickers” New Debt from Distressed Lenders: Mezzanine, Convertible Loans, Warrants Restructuring fees and Success fees Factoring of Receivables Securitization of Assets and/or Revenue Streams Strategic or Private Equity Investment Rights offerings A Caveat: “Nuisance Value” of Equityholders Case Firms: Infinity Carpets: Negotiating Claims Changes in Bankruptcy, with Excel model Lyondell Chemical Restructuring Topic 6: Financial Restructuring – Valuation Financial restructuring of distressed firms virtually always involves enterprise valuation, if only to attribute and allocate the firm’s value among a reconfigured claims hierarchy. The restructured firm generally has to be sound from a credit standpoint in order for claimants to realize recovery, over time, from that value. Enterprise Valuation DCF Approaches: Appropriate discount rates Sound terminal value assumptions Comparable firm valuation Identifying the relevant peer firms: “Dimensions of Comparability” Identifying relevant valuation metric Price/Earnings Price/Cash Earnings Price / FCF EV/EBITDA Price/Book Replacement Cost Comparable transaction valuation Identifying the relevant comparable transactions Identifying relevant valuation metric Post-restructuring Creditworthiness Credit assessment Ratings of publicly-traded instruments Financial flexibility going forward Case Firms: Restructuring Navigator Gas Transport PLC and Delaware Worldwide Topic 7: Restructuring Options – Strategic Sometimes financial restructurings, or the recovery of value following such restructuring, involve strategic changes such as major asset sales or selective re-leveraging. Strategic Restructuring via Asset Sales Which Assets to Sell? How to Decide? How to Maximize Disposal Proceeds without Selling All the Most Attractive Assets Integration of Financial Recovery with Future Enterprise Strategy: forward/backward integration Bundling of Assets Process Outright Sale of Discrete Operating Assets to Strategic Buyer Outright Sale of Operating Units to Strategic Buyer Outright Sale of Discrete Operating Assets to Opportunistic Buyer Outright Sale of Operating Units to Opportunistic Buyer Sale of Assets via Capital Markets IPO of Equity in Operating Units Sale of Securities Convertible into Ownership in Operating Unit Realization of Latent Value in Real Estate Outright Sale Sale/leaseback Securitization Leveraged Sales of Operating Assets/Units Leveraged Buyout Management Buy-out Management Buy-in Reconciling Asset Sales and Disposals with Covenants on Existing Debt Laying-off Liabilities to Buyers in Disposals Lease liabilities Pension and Other Benefits-related Liabilities Environmental Liabilities Contingent Claims Impacts of Asset Sales on Shareholder Value Ratings Impact Cost of Capital Financing Flexibility for Future Growth Enterprise Valuation Equity Valuation Case Firm: Donald Salter Communications PLC Topic 8: Distressed Debt Investing and Investors Often existing creditors in a distressed firm have to contest their claims with newer arrivals, namely distressed debt investors. Such hedge funds and specialized “special situation” private equity funds often purchase debt claims in troubled firms at big discounts, and then enter the resolution process to try to earn out-sized returns. Conventional creditors should have familiarity with their organization and tactics, as such investors can be adversaries in the restructuring process. Case Firms: Oaktree Capital Management and Countrywide PLC Oaktree Capital Management and Diamond Foods