restructuring Flashcards
(28 cards)
what are the 3 components of total debt?
Public, household and NFC
what is the historical trend of D/E and D/ebitda?
both were much lower in 2008 (27% and around 1.3). Both peaked during covid and are now around 34% and 2.1.
what was the trend of IRs in Europe?
as D/E started to rise from 2008 the rates were kept low to support companies in the liquidity crisis. these ended up spiking after the start of the Ukraine war.
what is quick ratio? what’s his purpose? what was its trend?
Current assets/ Current liabilities. it’s used to measure liquidity and should always be around 1 for sustainability. it followed a steady downward trend starting form 2008.
what are the 3 macro factors affecting default probability? (making restructuring so attractive for the market)
High debt/ebitda, high interest rates and low liquidity (Quick ratio steadily below 1 and decreasing)
what are the 2 variables used to measure potential losses in case of default? how are they measured?
Probability of default is the probability a creditor will not be paid. As a proxy, it is used the Historical Default Rate.
Recovery rate is the amount which can be recoverable after a default. Look at the sample of companies that issued bonds in the financial markets, it can be retrieved from the post default bond prices which reflects the expected amount of bond which will be paid back. (Recovery is meaningless for debt with lower seniority)
what is zombie effect?
when companies (especially the ones that suck major cock) are kept alive by government subsidies in times of crisis.
which is the correlation between default and recovery rate?
the higher the default rate the lower the recovery rate since the second is mainly driven by market sentiment.
what is maturity wall? why is it relevant?
a large amount of debt maturing in a short span of time which might be hard to refinance if the company and the market are not healthy. it is relevant for 2 reasons: healthy companies like to refinance debt (not pay it down) and it can often be the occasion in which a company defaults.
what was the situation in terms of maturity wall in 23/24 for high yield bonds?
a lot of debt expiring in 28/29, a lot of short term debt was refinanced with longer maturities in ‘24. In europe default probabilities were revised upwards as the maturity wall was within 2-3 years.
Which are the most relevant forms of debt remonetisation?
-new equity is injected to repay the debt
-Liability restructuring: debt is extended with revised terms, this is viable when the business plan is healthy. (amend and extend)
-Asset restructuring: the asset side of the BS is restructured, cutting and selling surplus assets to repay debt.
-debt-to-equity swap: debt is refinanced by giving equity to the debt holder, this doesn’t change anything from a balance sheet size perspective but dilutes existing shareholder
what is value break?
the amount of EV of the company attributable to debtholders
what’s the convention on voting rights during Debt-to-Equity swaps? why?
When in a corporate restructuring there is both a capital injection and a debt-to-equity, shareholders who are putting money do not want to be diluted from someone who is not injecting new capital, for instance debt-to-equity equity raised will have 1/10 of voting rights per share compared to new ones.
what are the steps of a distress breakout? why does restructuring start in each stage? what determines the move from one stage to the other?
- Stage 1: incubation moment of distress caused by a lower performance of revenues or cost (spending more) compared to peers. Causing weaker margins in terms of EBITDA or Operational Margins.
- Stage 2: the situation will not be sustainable anymore; the weak margins lead to a loss. This situation is called Emergences of Losses (NI < 0) eroding the equity level (INCREASE D/E) and decreasing the ability of the company generating cash.
- Stage 3: crisis outbreak is the situation of insolvency. When companies are unable to pay their liabilities.
THE CLOSER YOU ARE TO LEVEL 1 THE MORE VOLUNTARY IS THE INITIATION OF RESTRUCTURING
- the magnitude of losses and the time for which the loss period lasts
Who are the key people responsible for crises?
understand managerial mistakes from management team and replace them. In other cases, shareholders also play a responsible role (really high dividends). Other times creditors are guilty because they overlook the situation in earlier times.
which are the root causes of a crisis?
o Corporate Frauds
o Change in regulations (systematic effect and not idiosyncratic)
o Inefficiency -> less efficient compared to peers (high costs), unsustainable EBITDA margin due to prod./marketing./tech. (HSBC case)
o Excess Capacity (Oversupply) (Automotive) ->A sudden change in the industry demands, lead to a drop in the market shares making it not possible to distribute fixed costs and so reducing margins.
o Product Obsolescence (Nokia / Kodak / Bbusters) -> due to market disruptions and consumer behaviours shift.
o Lack of Planning (WeWork) -> the firm is not proactive, goals are badly set, or goals are disproportionated compared to the available resources.
which are the 4 quadrants available for creditors when approaching a restructuring procedure?
they can do in and out of court / Keep the firm afloat (restructuring) or liquidate it (insolvency procedure and voluntary liquidation)
which are the considerations made when choosing whether to proceed in court or outside?
The choice of being in-the court or out- (especially for restructuring) heavily depends on the effectiveness of jurisdictions/legislation (UK and US is more effective). Other factors to take into account are the Direct costs (costs of the procedure vs fees of the advisors, sacrifice of creditors’ and shareholders rights) vs Indirect Costs (reputation, destruction of intangible assets, lost opportunities, time required for the approval of the restructuring plan).
what is restructuring under ch11? what’s the first step?
A voluntary procedure started by the debtor and supervised by the court.
Filing for Protection (Start of Chapter 11)
The process begins when a company voluntarily files for Chapter 11. This triggers two major protections:
Standstill: Creditors can’t take legal action to collect debts during the restructuring period.
Debtor-in-Possession (DIP): The company continues to operate its business and manage its assets — no external administrator is appointed — but now under the oversight of the court.
what’s the second step of restructuring under ch11? what are creditors incentivized to vote for?
Restructuring Plan
The company has 120 days to submit a restructuring plan that outlines how it will reorganize and pay its debts.
The plan needs approval from creditors. Creditors are grouped into classes (e.g., secured, unsecured, subordinated), and votes are weighted by the size of each creditor’s claim.
Subordinated creditors (those lowest in the repayment hierarchy) usually support restructuring because in a liquidation, they get little or nothing.
Senior creditors, on the other hand, may oppose restructuring if they believe they’d recover more money through liquidation.
what is cram down? what happens if plan is refused by creditors and there is no cram down?
Even if some creditor groups reject the plan, a judge can approve it anyway if certain legal criteria are met. This is known as a “cram down.” It allows the court to enforce the restructuring over the objections of dissenting creditors. If no agreement is reached, the company exits Chapter 11 and moves to Chapter 7, which means full liquidation of assets to repay creditors. (or chapter 13 which is similar with payments distributed overtime)
what are the pros and cons of liquidating in court
pros: loss is tax deductible, easy to estimate the actual recovery rate, creditor protection is ensured by the court
cons: long procedure, low recovery rate, loss of intangible assets (if the company is liquidated) and of social capital.
what is the timetable of private restructuring procedures?
phase 1: insolvency declared, an advisor is selected and a restructuring plan is prepared
phase 2: negotiation of restructuring conditions with creditors, creditor approval and restructuring plan implementation
who takes the lead in private restructuring procedures?
depends on firm size and debt concentration.
for small firms with concentrated debt the bank takes the lead role.
for large firms with concentrated debt there is a coop between advisor and main bank
for large firms with dispersed bank the advisor has lead role.
