Restructuring solutions for investment banking: everything you need to know

Restructuring investment bankers are product experts with a deep understanding of the technicalities and dynamics of financial restructuring according to stakeholders’ needs. Restructuring is a technical product group of investment banks, similar to M&A, but with increased emphasis on precision. Essential components of financial restructuring are understanding the leveraged finance market, credit analysis and legal documents, and proficiency in negotiations and workout situations. An investment bank’s restructuring group in provides the following solutions:

• Advisory related to financial recapitalisation and restructuring 

• Equity and private debt raising

• Liability management

• Distressed M&A

• Expert testimony

Most restructuring requirements arise when debtors accumulate outstanding obligations that they find difficult to serve. If the repayment challenge is due to inappropriate capital structure, a capital restructuring would be a lucrative solution. A company may sometimes face distress due to industrial disruptions, external shocks, geopolitical events or poor management decisions. Once the company shows signs of distress, the catalyst may consider restructuring solutions.

Understand the debtor and the creditor sides

Just like a buyer and seller in an M&A deal, restructuring solutions have two sides: debtors and creditors. An investment bank’s restructuring team represents only one side of a deal. A debtor may engage in restructuring if it faces any of the following situations: 

Stressed situation: The debtor can still pay the debt interest but has trouble facing the upcoming maturity with principal repayment.

Distressed situation: The debtor has already missed the principal or interest payments or violated covenants.

Bankrupt situation: The company has already declared failure to repay the amount and seeks the best possible outcome with restructuring.

Creditors may be banks, mezzanine or subordinated lenders, or bondholders. While providing restructuring solutions to creditors, the investment bank will try to find the best possible terms to recover their money. Sometimes, the bank may also raise extra capital to support the debtor or creditor. Unlike M&A, leveraged finance, DCM, ECM and industry groups, restructuring solutions for investment banks focus more on maximising value and minimising losses.

Signs that financial restructuring solutions are needed

• Missing the interest payment: The debtor may skip an interest rate payment if it lacks the money.

• Missing principal repayment: The debtor may also miss principal repayment due to a lack of funds, but this is a more dangerous situation for the creditor. Missing an interest payment means loss of additional income for the creditor, but missing the principal repayment means loss of invested capital.

• Covenant violation: When the debtor lacks finance, it breaches covenants. As a result, the creditor’s income declines, and the debt remains unpaid.

• Declining credit rating: As the debtor’s income decreases and financial obligations increase, credit rating agencies give it a lower score, reducing its access to credit.

• Reducing cash balance: The debtor’s finances keep reducing. If this continues, it will fail to pay employees and suppliers in a few months.

Possible restructuring solutions based on the situation

Out-of-court restructuring

Restructuring solutions try to honour transactions in the interest of all distressed stakeholders. A financial advisor assesses a company’s debt capacity and its actual value. Accordingly, it would map out a new capital structure to prevent bankruptcy and benefit all members. The easier the capital structure, the easier the restructuring. Out-of-court restructuring is the most feasible and least expensive option, with maximum room for negotiation. The restructuring team will work with the stakeholders to reorganise the capital plan depending on the company’s capacity and tolerance.

Liability management and distressed M&A 

A distressed company may need to sell its assets or liquidate the company within a short period of time. Financial advisors will seek the best prices according to the circumstances and to benefit the stakeholders. Liability management involves coming up with innovative solutions to address balance sheet requirements, depending on the covenants. 

Raising private capital: Financial advisors with strong private capital may advise a debtor to incur private debt. This is a highly structured financing solution with appropriate return expectations.

Restructuring is the best possible solution during a recession, market crash or downturn.

Read Also: How important is the role of asset managers in AUM reporting?