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Overview of Restructuring Click to edit Master title style

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Introduction What is a Restructuring?

 A financial restructuring is typically required when a company can no longer repay its debts  Typically occurs when a company’s enterprise value (that is, the total value of its operating assets and non-operating assets) is less than the value of its total debt and obligations  Obligations can include bank debt, bonds, and other financial liabilities  In some situations a company may be able to meet all of its interest payments, but unable to satisfy debt maturities  If a company is unable to repay or refinance its outstanding obligations it will typically have to restructure its balance sheet CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

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Capital structures - where does the value break? Capital Structure Overview

Equity Out of the Money PIK Notes Value breaks Second Lien Secured Debt In the Money First Lien Secured Bank Debt

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Financial restructuring scenarios Healthy Company HEALTHY COMPANY VALUATION Value

Liquidity Obligations

Unlevered Cash Flows

Cash Interest

Cash Flow For Debt Repayment

EQUITY VALUE

ENTERPRISE VALUE OBLIGATIONS

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Financial Restructuring Scenarios Distressed company, pre-restructuring DISTRESSED COMPANY - PRE-RESTRUCTURING VALUATION Value

Liquidity Obligations

Out of the Money

EQUITY VALUE

ENTERPRISE VALUE

OBLIGATIONS

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Unlevered Cash Flows

Cash Interest

Cash Flow For Debt Repayment

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Financial restructuring scenarios Distressed company, pre-restructuring DISTRESSED COMPANY - POST-RESTRUCTURING VALUATION Value

Liquidity Obligations

Unlevered Cash Flows

Cash Interest

Cash Flow For Debt Repayment

NEW EQUITY VALUE ENTERPRISE VALUE

NEW OBLIGATIONS

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Capital Structure – Rank, Security and General Terms  Spreading a company’s capital structure means listing all of the firm’s obligations, with secured debt first (in order of seniority) and unsecured debt second (in order of seniority; senior vs. subordinated) CLASSIFICATION

TYPE OF DEBT

SECURITY

DURATION

TYPICAL HOLDERS

Senior Secured Bank Debt

Revolving Credit Facility / First Lien Term Loan

A/R, Inventory, Equity, PP&E

1 - 5 yrs

Commercial Banks

Senior Secured Bank Debt

Second Lien Term Loan / Third Lien Term Loan

PP&E, Equity

3 - 5 yrs

Commercial Banks and HF

Senior Secured Bank Debt

Senior Notes / Subordinated Notes

Unsecured obligations, with recourse

5 - 20 yrs

Institutional Holders and HF

Equity

Unsecured obligations, no recourse

5 - 20 yrs

Institutional Holders and Sponsors

Senior Secured Bank Debt

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Financial Snapshot  The purpose of the financial snapshot is to provide a historical overview of the company’s cash flow and financial performance  We split cash flows into three basic segments CASH FLOW FROM OPERATIONS • •

Earnings Before Interest, Taxes, Depreciation and Amortization Provides a proxy for cash flow generated by assets, before debt servicing requirements (i.e., interest payments)

CAPITAL EXPENDITURES •

Shows us how much the company needs to reinvest in order to continue generating EBITDA Distressed firms may be under-investing in Capex in order to conserve cash and make interest payments EBITDA potential

CASH INTEREST EXPENSE •

Cash paid for interest tells us how much cash is required to continue servicing the current capital structure If a company cannot meet its interest payments it will default on its debts and be forced to restructure

EBITDA – Capex – Cash Interest = Free Cash Flow (before Working Capital)  If Free Cash Flow is negative, we want to compare cash and borrowing availability (i.e., total liquidity) to understand how long it will take the company to burn through its cash CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

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Strategic Alternatives

 Strategic alternatives provide an overview of the basic restructuring options available to the debtor and its creditors ― Incorporates key considerations / analysis and presents restructuring options

• Industry dynamics, valuation range, liquidity, covenants, debt capacity, ability to obtain

financing, timing, etc.

 Typical strategic options OUTRIGHT SALE OF COMPANY • •

Value can be maximized by selling the firm Limit cash burn, achieve control

NEW MONEY / REFINANCE •

If liquidity / maturity is an issue, a refinance or equity infusion may provide enough liquidity to help the company survive and effectuate an operational turnaround

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DEBT FOR EQUITY SWAP

SELLING ASSETS •

It may prevent a restructuring, or it may serve as the basis for a restructuring around the remaining assets

• • •

Debt can be traded for equity Typically dilutive to current equity Requires the equity sponsor to acknowledge that at least a portion of their investment is ‘out of the money’ 9


Key Players in the Restructuring World

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Exercise I Basic understanding of the capital structure and seniority of different securities

 Company ABC has been going through very rough time  Because of the economic downturn, ABC has lost major clients and can not serve its debt any more and is going through a liquidation process by way of a sale

 Here is an overview of the capital structure of ABC: Subordinated bond

@10.0%

£50m

Senior subordinated loan

@L+5.0%

£100m

Senior, unsecured loan

@L+4.5%

£300m

Equity

 ABC’s stakeholders found a buyer, company XYZ. The deal is closed at a valuation of 10.0x EBITDA of £35m What is the Equity value of the company, assuming there is no accrued interests?

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Exercise II Loss and recovery analysis, more complex structure

ABC, Hold Co

ABC, Op Co I

Junior unsec. debt

$25m

Senior Sec. debt

$50m

ABC, Op Co II

Junior debt I

$75m

Junior unsec. debt II $50m

Senior debt I

$150m

Senior debt II

$100m

ABC, Op Co II is liquidated and sold at 10.0x EBITDA of $17.5m, what do the different lenders get?

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Coaching assembly overview of restructuring