Restructuring Investment Banking (RX)

Restructuring Investment Banking (RX)

Restructuring investment bankers are hired on as product experts that understand the dynamics and technicalities behind each necessary restructuring and the needs of all the relevant stakeholders.

Financial restructuring is a very technical product group in investment banking, similar to traditional M&A, but with more emphasis on the precision of assumptions. Credit analysis, an understanding of leveraged finance capital markets, familiarity with legal documents, and extensive experience with workout situations and negotiations are important components of the restructuring toolkit.

The financial restructuring group within the investment bank can provide services related to:

• Restructuring and Recapitalization Advisory
• Chapter 11 Services
• Private Debt and Equity Raising
• Liability Management
• Expert Testimony
• Distressed M&A

Cause for Restructuring Advisory

Most financial restructuring mandates arise when a debtor has outstanding obligations that it may have difficulty servicing because its capital structure is not appropriate for the business.

Companies become distressed due to broad industry disruptions (think yellow cabs vs. Uber), external shocks (monetary/fiscal crises, wars, geopolitical events), and poor management decisions. Once stressed, a specific catalyst can begin the restructuring discussions.

For a restructuring to be imminent, there needs to be an upcoming liquidity event that puts pressure on the debtor to start discussions with creditors.

If the next debt maturity is not for a few years and the company still has ample cash or runway via their credit facilities, management may be inclined to adopt a wait and see approach rather than proactively coming to the table with other stakeholders.

Debtor vs. Creditor Side Mandates

Restructuring investment banking mandates typically involve two advisors: one for the debtor side and one for the creditor side. On the creditor side, the investment bank may represent more than one creditor constituency. Different classes of bondholders often come together to hire an advisor.

The relevant creditor class will have the most leverage in restructuring negotiations because they own the fulcrum debt or fulcrum security. The fulcrum security is the most senior security in the capital structure that will most likely convert to equity. As such, owners of the fulcrum security are most likely to control the company in the event of a reorganization.

Debtor Side Mandates

The objective of the debtor-side investment bankers is to maximize the value of the company.

The objective of the debtor-side investment bankers is to maximize the value of the company.

On debtor side mandates, management retains a restructuring investment banking group to help the company assess available options.

In addition, the RX bankers perform due diligence, complete valuation work, and calculate debt capacity.

For the restructuring itself, the investment bankers help the company form a Plan of Reorganization (POR) to present to creditors and negotiate for the best outcome. As part of this process, the restructuring investment bank’s private capital groups will help tap financing needed for the distressed M&A processes.

The debtor side bankers will be the primary liaison to the creditor side investment banks during the due diligence process, as creditors will often want to remain unrestricted (free of insider information) and therefore able to trade their positions.

Creditor Side Mandates

The objective of the creditor side bankers is to maximize creditor recoveries/value.

The objective of the creditor side bankers is to maximize creditor recoveries/value.

Creditor-side investment bankers are in charge of looking at the debtor company’s business plan, projections, drivers, and assumptions before negotiating with the company and its advisors. They will try to get as close to the final deal as possible before getting their clients restricted to finalize a deal.

Restructuring investment bankers will rarely advise the equity as they are out-of-the-money options unless a financial sponsor is looking to inject new capital as part of the restructuring solution.

Investment banks generally pitch for the debtor side mandate first, as fees for such an arrangement are usually based on the entire face value of the company’s debt outstanding. The company side advisor gets to conduct any distressed M&A / asset sales and private capital raises, all of which generate additional fees.

Creditor mandates are less lucrative because fees are based on the face value of debt for a specific creditor class.

Restructuring Deal Types: Out-of-Court Chapter 11

Restructuring investment bankers look to consummate transactions that satisfy all stakeholders in a distressed debt situation.

A financial advisor will look at the debt capacity of the business and assess its true enterprise value by mapping out a reorganized structure that satisfies all stakeholders and prevents bankruptcy.

The simpler the capital structure, the simpler the restructuring. An extreme example is a uni-tranche piece of debt and accordingly, only one creditor to negotiate with. If an out-of-court restructuring is feasible, it is the least expensive option with the most room for negotiation.

Restructuring investment bankers will work with the company to liaise with key stakeholders to form a Plan of Reorganization (POR) that determines how the company will come out of restructuring. Investment bankers can also be instrumental in securing debtor-in-possession (DIP) and exit financing.

In the most organized cases, there is a pre-packaged bankruptcy where all creditors are ready to vote in favor and the company can emerge from bankruptcy in a short time frame. Conversely, when stakeholders have opposing views, a company can end up in a free-fall bankruptcy that is expensive and takes the most time.

Distressed M&A and Liability Management

Distressed companies under a workout situation may need to sell assets, or themselves, on a tight timeline.

Financial advisors seek to get reasonable prices expeditiously in circumstances where such sales may be contested by other stakeholders.

In addition, there is “liability management”, which refers to creative solutions that companies employ to address their balance sheet needs, depending on what their current credit covenants allow them to do.

Restructuring professionals can also help companies engage in corporate finance activities such as exchange offers and tender offers opportunistically.

Private Capital Raising

A financial advisor with a strong private capital markets franchise will market private debt and equity solutions to their buy-side counter-parties.

Private debt is highly structured and heavily negotiated, so the investment banker must know who the logical buyers are, as well as their return expectations.

Top Restructuring Investment Banks

Each investment bank will have its own branding for the restructuring division, and in marketing materials, may also be known as capital structure advisory, restructuring & special situations, and distressed M&A advisory.

Most bulge bracket investment banks offer a suite of services which are anchored around corporate banking or lending, therefore the potential for conflicts of interest arises if hired as restructuring advisors. However, these conflicts can be mitigated, and certain “balance sheet banks” – typically large banks that loan directly from their balance sheets – will have restructuring practices, albeit smaller.

For this reason, restructuring advisory falls into the purview of the elite boutique investment banks.

There are also Big 4 and turnaround consulting firms that provide restructuring services, although they will take on an operational or more administrative angle.

Role of Restructuring IB Analysts

For the most part, there is less pitching in restructuring groups compared to M&A or general corporate finance.

Although restructuring bankers create marketing materials and some pitches, marketing is less important as there are a limited number of top restructuring franchises and restructuring bankers may get a tap on the shoulder from lawyers or other workout process professionals they’ve worked with in the past.

That said, restructuring investment bankers still put together creditor and debtor side pitches for new situations and monitor debt markets closely for signs of distress to facilitate conversations with companies and creditors.

A restructuring investment banking analyst may be in charge of running a debt pricing screen to look for companies with elevated leverage, potential covenant breaches, upcoming maturities and distressed trading prices using a data provider such as Bloomberg or CapitalIQ.

If several criteria are met, they may be tasked with looking into the prospective restructuring candidate’s situation and put together a situation overview – outlining leverage, business issues, the industry backdrop, and recent events.

If senior bankers are interested, a VP assembles a team of analysts and associates to put together pitch materials. Junior bankers will organize conference calls and meetings with prospective clients and senior bankers. In today’s COVID environment, this means a lot of Zoom and Microsoft TEAMS calls.

If engaged, junior bankers will be responsible for building sophisticated financial models and quantitative analyses that will inform the recommendations to be outlined in subsequent materials for the client. Of course, the analyst will also be charged with administrative work like putting together credit agreement books and saving down due diligence files.

Current Trends in Restructuring IB (Post COVID-19)

The onset of COVID spooked credit investors and closed both equity and debt capital markets. This led to large numbers of bankruptcies as refinancing became challenging and leverage metrics skyrocketed, as the pandemic-affected EBITDA no longer supported the debt.

It is likely that companies that were distressed before COVID will still head towards restructuring once a liquidity event occurs.

Restructuring investment banking deal pipelines filled up with record revenues are looking more likely.

However, given the stimulus measures taken in the U.S. and around the globe, capital markets have reopened and are issuer friendly, allowing for normal refinancing even for financially stressed companies as debt maturities are pushed back.

Despite the economy, private equity activity is ramping up because of access to debt capital markets, although the spectrum of conservative and aggressive firms is wide.

Certain financial sponsors have taken write downs and taken money off the table (possibly through recapitalizations) while others are taking advantage of investor demand and continuing to look at LBOs.

It is likely that companies that were distressed before COVID will still likely head towards restructuring once a liquidity event occurs (upcoming maturity or failure to meet recurring debt service) while healthier companies have runway from refinancing options. Companies that have been disrupted by COVID may face restructurings down the road.

Restructuring Investment Banking Career Path and Salaries

Financial restructuring and special situations groups within investment banks (not to be confused with special situations groups that sit within the sales and trading function of investment banks) follow the same trajectory as other investment banking divisions.

Typical RX Career Path:

• Analyst
• Associate
• Vice President
• Director/Executive Director
• Managing Director

In some banks with restructuring practices, analysts and early associates may not specialize in a product group and will be responsible for supporting both M&A and general corporate finance work. At these firms, specialization in restructuring investment banking starts at the associate or VP level.

Salaries and bonuses for restructuring investment bankers are in line with other investment banking products at the junior level, with banks with stronger restructuring practices paying higher than their corporate finance contemporaries.

The base salaries in RX are usually around $85,000 for a new investment banking analyst, plus a $60,000 to $120,000 bonus as tenure increases.

Restructuring Recruiting: Interview Process

Restructuring investment banking follows a similar recruiting schedule as general investment banking. Investment banks with a restructuring presence will recruit at schools at the beginning of the school year (and possibly in the summer before, but COVID has affected schedules).

As with other investment banking opportunities, students can attend networking events and grab coffee with bankers throughout the year to get their names out there.

For the restructuring investment banking interview, all the standard investment banking technical questions will be asked. If the role is for a restructuring group, behavioral and fit interview questions will ask why the candidate wants to join the restructuring group.

The technical questions will be on the rigorous side due to the nature of restructuring work.

Additionally, there will be a subset of restructuring technical interview questions that deal with fulcrum security, bankruptcies, and normalizing EBITDA.

Exit Opportunities from Restructuring Investment Banking

Given the rigorous modeling skills restructuring demands, restructuring analysts are competitive for private equity and hedge fund exits.

Financial restructuring investment banking exit opportunities may appear more limited relative to M&A and leveraged finance, given the niche nature of restructuring work.

However, given the rigorous technical modeling skills that restructuring demands, analysts are competitive for traditional private equity and hedge fund exits.

For many elite boutique investment banks with restructuring practices, analysts are generalists and will also work on M&A and other corporate finance mandates, making them suitable for the normal suite of buy-side opportunities.

Restructuring analysts and associates are first in line for credit funds and distressed debt/special situation shops due to their familiarity with the investment opportunities that these buy-side participants look for.

In addition, there is value to understanding indentures and other credit documentation, which puts restructuring analysts at the top of the heap in terms of any case studies required for the interview process.