Do you love numbers? Do you know the market in and out? And do you want to take your industry to the next degree? If your answer to all these questions is an exuberant ‘Yes!’, then you should try restructuring.
Restructuring is the corporate administration phrase for the deed of reorganizing the lawful, possession, functional, or further contours of a corporation for the goal of rendering it more successful, or nicer governed for its current requirements.
Restructuring consultations are recognized as being some of the hardest consultations on Wall Street. Nonetheless, this stature doesn’t arise from how intellectually demanding the queries are but rather originates from how oblivious most interviewees are about what restructuring truly is in exercise. Usually, if you have a knowledge of what restructuring is and what sorts of questions are posed, restructuring investment banking interviews are as simple to excel in as any other conventional M&A interview.
To know everything about the questions that you’ll be asked in your restructuring interview at Wall Street, keep reading the article till the end!
Restructuring Interview Questions
1: What is a cram down?
Cram downs are not widespread, but occasionally you’ll be inquired if you know what they are in an interview only because some book on the restructuring of forlorn debt will discuss them.
A cram down is a procedure by which a proposal of reorganization (POR) is assigned on an inadequate level that has wanted to dismiss the agenda. This can be performed by the judiciary if at least one defective degree (not encompassing insiders) ballots for the POR.
Cram downs are performed to prevent having a single block of ballots ballbuster the capability for a corporation to get out of Chapter 11.
2: How are buy-side cashiers conceding to the COVID-19 catastrophe?
A lot of accounts who have waited on the sidelines before are thinking of putting forward fresh stock and dry powder for economical values.
The 2-20 prototype that was perishing (has been 1-15 lately) now has a motive to begin again – grabbing the right fence budget during this period has given tremendous rescues in a period of discomfort whereas several long, long-shorts (who are long) and other policy hedge funds have been snuffed out, particularly if they were prized.
3: What is a discounted offering?
Treaties are generally handed out at equality with the ticket being the demand riding profit for the corporation – nonetheless when bank workers see the OID or original issue discount, which implies that the contract was handed out at a rebate to achieve a lower ticket.
It is formulated to have shorter debt service regulations for the period of the contract.
4: What are some traits that will specify how debt will rate?
Maturity and period structure are some traits that will specify how debt will rate– in this concept if a contract has a closer maturity than the other cycle, it has a greater validity of being reimbursed given that there is sufficient fluidity for the corporation. If the corporation is going to decline before that maturity, then it should in concept be marketing the same as the higher dated treaty.
Collateral – If specific assets are ring-fenced for a unique degree of deficit, they will normally acknowledge bigger comebacks than unsecured creditors.
Seniority – If greater on the equity pile (senior unsecured versus expressly submitted notes), want the aging notes to deal nearer to average.
5: What is a par-for-par trade?
Par-for-par trade is a contract that can be traded for fresh consideration of notes.
As an advantage, the contracts can propose a bigger ticket, higher dated maturity (if it does not cure prevalent difficulties, this may lead to a loss), capital authorizations – so bond owners can get offshoots of the corporation which may be instantly bought – efficiently increasing the earnings or a shift to payment-in-kind or PIK dividend.
Eventually, if the price is not evaluated appropriately when the restructuring completes again, the balance sheet has not been appropriately right-sized and there may be some more restructuring down the lane.
Relying on the tenures of the trade, value grade agents may consider it to be a despicable agreement and proclaim it to be a bankruptcy (of which there are differing degrees)
6: Where does each tranche of debt trade if the deficit is halved into a conserved 1L $200 million bank revolver and $300 million in senior unsecured notes (SUNs)?
The $400 million will cover the entire $200 million bank loan (if it is fully drawn), and the payments will be made in a waterfall pattern, ensuring a full recovery. This leaves $200 million for the $300 million in SUNs, resulting in a trading price of roughly 66 cents for the notes.
7: What are some indicators that a company or a corporation is in trouble?
- The commodity is presently dealing for less than a buck.
- The demand capitalization of a corporation is smaller than 15% of its cumulative price.
- When risk-free interest is paid, the yield-to-worst (YTW) is very high, or the market value of the debt is well below par.
8: What is an up-tier trade?
An up-tier trade is when a contract leverager proposes a poorer principal amount (and probably interest) for more seniority in the equity pattern.
This is not certainly esteemed as an event of default (EoD) by the grading agents if they deem it to be avaricious and not innately to prevent a default (upset trade). Keep in mind the prime obligation of a corporation’s administration is to its shareholders, not bond owners or workers.
This can be a means to lessen deficit, lessen dividend expenditures, lessen the quantity of deficit influenced by treaties and banish maturities.
Bond owners have to be cautious to discern how much of a deficit is permitted before their deficit in giving rise to an investment judgment.
9: What could aid creditors to take up an up-tier trade in place of being an arbitrator?
- Curtailed fluidity of lasting actual problem
- Prematurely tender inducements proposing surplus principal
- Tenders may need a 90% or different limit so they cannot autonomous ride
10: What are the things that are more interest-rate sensitive? Is it better to invest in investment-grade bonds or high-yield bonds?
Bonds in the investment-grade category tend to move more closely with the risk-free benchmark (same duration or interpolated US Treasuries). Particular value profiles and what comprises a favorable retrieval on interest are used to price high yield bonds.
Bonds with lower risk are more likely to have a longer duration and convexity.
11: Where is the fulcrum security/what is value break?
This is the capital stack tranche in which the security will not be fully recovered as valued.
In a simple example, if a company is worth $300 million and has $100 million in secured bank debt, $300 million in unsecured bonds, and $100 million in subordinated convertibles, the bonds will lose value and be worth only 200/300, or 67 cents on the dollar. In this case, the subordinated convertibles are worthless (or option value).
12: A cyclical business has an EBITDA of $100 million and a deficit of $500 million. Where should the deficit be priced if strong counterparts are buying and selling at 4x EBITDA?
Dismissing insolvency dynamics and the corporation’s penalty administration alternatives, you’d anticipate the deficit to be worth no greater than 80 cents on the buck. This is an oversimplification.
$100 million multiplied by four times is $400 million in enterprise value and $500 million in debt face value. Due to providing discords and difficulty in equipoising the deficit or auctioning the organization to recognize the comeback, there should be a deeper discount in reality.
13: In terms of normalizing EBITDA for a failing company, what are some areas you’d look at?
- Leases that are more expensive than the market (rents in better times)
- Costs that do not occur again
- Professional fees/costs of restructuring(auditors, attorneys, restructuring advisers like AlixPartners, interest bankers)
- Vendor difficulties have inflated the expense of commodities sold (distinguished to a strong corporation’s EBITDA ledges).
- Salaries that are above average
14: A distressed firm with a simple capital structure or a distressed company with a complex capital structure, which one is more likely to be settled out of court?
It is simpler to negotiate with a complicated equity hierarchy. With a complex capital structure that includes several classes of debt, junior debt, and equity, it’s far more difficult to bring everyone together and come up with a solution that everyone likes, which increases the danger of holdouts.
Because of the treaties of every trance of deficit, there are additional limitations on what can be done.
15: What is an advantage of going through the legal system?
Alternatives such as a cram down and the denial of distressing agreements can be used to avoid holdouts.
16: In an out-of-court reorganization, how do you reach an agreement?
Corporations and big cashiers (fulcrum security) review penalty administration strategies in out-of-court RX.
Finally, a solution that benefits everyone must be found, and shareholders and out-of-money bondholders/junior creditors must be paid a “tip.” Otherwise, they can aggravate the issue, sabotage negotiations (as holdouts), and compel a court-ordered restructuring.
17: What are some alternatives to court-ordered reorganization?
Fresh money refinancings — when new capital is injected and some debt is redeemed for equity, this is known as a new money refinancing (see debt-equity swap).
For companies with no current cash flow, complete equitization may be required.
Cash can likewise be used (paying up a fraction of the treaties – not certainly at par – when the remainder remains in the capital stack).
18: What is the purpose of a liquidation analysis?
To impose a cram down, it may be necessary to establish that no minor cashier would be poorer off than in a liquidation circumstance.
A liquidation valuation will typically be lower than a continuing firm due to factors such as fire-sale prices (both from investors seeking a deeper discount and the seller’s desperation) and brokerage charges.
19: What is a bankruptcy that has been prepared in advance?
Before declaring bankruptcy, key stakeholders (possible fulcrum securities) have agreed on a reconstruction plan. In contrast to a free-fall insolvency, when there is no agenda and the protocol might slug on, relinquishing a lot of significance in the tribunal procedure, this streamlines the process.
20: What is DIP financing, and how does it work?
Post-petition financing for super-seniors. Senior lenders frequently put themselves in a position to become debtor-in-possession lenders.
21: What can a business do right before declaring bankruptcy?
They would frequently fully draw on their revolvers to have cash and liquidity throughout their Chapter 11 filing. Banks despise this. Anti-hoarding wording in revolving credit facilities may be used to prevent this, allowing banks to achieve debtor-in-possession status during post-petition funding.
22: Is management’s fiduciary duty always limited to shareholders?
The administration has a fiduciary obligation to creditors when a corporation is certainly in insolvency and the capital price is nil (who are conceptually the fresh capital holders).
23: What happens if a prospect restructured debtor doesn’t prefer your bank?
You have the alternative to pitch the creditors. The debtor pays the creditors’ attorney, although the attainment expense is generally lower as a proportion, and the capital stack you’re exemplifying is insignificant (versus the whole property for the debtor attorney).
When it comes to organizing personal finance treatments or directing a forlorn M&A or aid exchange decree for the organization, the debtor side adviser would be the first choice.
24: What is a typically needed rate of return on the distressed debt that is restructured?
30 percent is frequently used as a discount rate by distressed debt funds for workout scenarios that are typical of short duration (a few years max).
25: What is the point at which bank debt begins to leave the capital structure?
Because of their seniority, banks normally stay put, and the deficit is illiquid and meekly marketed. When a company is in financial difficulties, it usually wants to avoid workout scenarios, thus loan exchanges are sold off to waver accounts and other demand parties at a discount.
26: Why is the stock demand capitalization still optimistic (the stakes nonetheless business above zero) if the company’s enterprise value is less than the debt’s face value?
Because the theoretical equity value is zero, the capital price eventually becomes the option value. Theoretically, assets are valued based on probability-weighted outcomes.
While if there was a liquidation today, the equity would be assigned a value of zero, if there is a 10% possibility that the economy would improve or a significant order will be completed, the equity should represent the probability-weighted value of that outcome. Of course, it is frequently overpriced.
27: When can you spot a market mispricing?
Frequently, there is a market mispricing — either the equity or the debt is mispriced. Or they will both be once institutional investors begin to go.
A good example is a strong trading value for the equities in terms of market capitalization, but the bonds are trading as if they are about to default.
Bonds should be at par if they are senior to equities and stock is trading at healthy levels. The equity should be trading at option value if the contracts are old to the capital and the contracts are marketing forlorn.
28: How well do you understand what you do in Restructuring?
Restructuring bankers advised distressed companies – businesses that were about to go bankrupt, were in the midst of bankruptcy, or were about to emerge from bankruptcy – on how to change their capital structure to avoid bankruptcy, avoid bankruptcy in the first place, or assist with a sale of the company, depending on the situation.
29: What are the two “sides” of a restructuring agreement? Do you have any idea which one we generally recommend?
Bankers can provide advice to either the debtor (the firm) or the creditors (those who have lent the company money). It’s comparable to sell-side vs. buy-side M&A in that in one, you’re advising the firm on how to sell or get out of the situation it’s in, while in the other, you’re advising buyers and lenders on how to get the most money out of the company.
Because everybody who lent money to the corporation is a “creditor,” the “creditors” are generally many persons. There are also “operational advisors” that assist in the turnaround process.
30: Aside from the fact that it’s a “hot” topic right now, why are you interested in restructuring?
- You develop a highly specialized skill set (and hence increase your value/employability), and much of the work is more technical/interesting than, say, M&A.
- You also have a broader perspective because you see both the positive and negative aspects of businesses.
- If you have any legal experience or wish to pursue it in the future, there is a lot of overlap with
Restructuring because you must operate within a legal framework and attorneys are engaged at every step of the process – so it might be one of your selling points.
31: How will you apply your Restructuring experience to your future job goals?
As already said. You can use the experience to work at a Distressed Investments or Special Situations Fund, which most people outside of Restructuring don’t have access to, in addition to the legal and “superior technical skills” aspects.
You might also return to M&A or regular investment and still have a technological advantage over other bankers. There is no such thing as a “bad” answer as long as you don’t state you have no future interest in it.
32: What criteria would a distressed firm use to choose its restructuring bankers?
Restructuring / Distressed M&A, more than M&A or IPO processes, demands exceptionally specific knowledge and relationships. Only a few banks have good practices, and they are chosen based on their previous experience with similar deals in the industry as well as their relationships with all other parties involved in the transaction.
Know that Restructuring pertains to a lot more people than a normal M&A or finance transaction – there are attorneys, stakeholders, deficit investors, suppliers, governors, administration, and disaster executives to deal with, and handling them all can be like flocking felines. Because lawyers are highly involved in any form of Restructuring / Distressed scenario, they can be a big source of revenue.
Conclusion
We hope that now you are fully aware of your next restructuring interview. Yes, Restructuring is the nicest faction during a low, slump, or demand collision, but it’s not a nostrum.
If all-around sale action plummets by 50%, an improvement in despicable contracts will not cure that misplaced quantity, particularly once you condition in all the $10 billion+ agreements that get abolished.
You could bring about the case that Restructuring at the nobility boutiques is the most promising entry-level position in IB, but you also have to adopt a bigger and more arduous time if you choose that path.
All the very best with your next restructuring interview!
Frequently Asked Questions
What comes about when a firm is restructuring?
When an organization, firm, or company restructures implicitly, the undertakings, procedures, offices, or holding may alter, facilitating the company to become more productive and efficient. Occasionally, a corporation may be required to acknowledge setbacks and start up selling or liquidating aids to pay up its creditors before perpetually ending.
How do restructuring bankers get redeemed?
Dissimilar from M&A bankers who get reimbursed a proportion of their finished contract, restructuring bankers get disbursed retainer payments when exemplifying a debtor. Creditors pay the boutique banks if they attain their fee, rationalizing a bank’s emphasis on assisting 1st or 2nd-degree cashiers.
What is thrilling about restructuring?
The curiosity of restructuring agreements and the intrinsic blend of psychology, regulation, and finance that come together to finalize a deal makes restructuring a thrilling and exciting process. The vast forage of possibility makes several chances accessible (going to a despicable deficit fence account, a conventional private capital corporation, an immediate usurer, etc.)
Is restructuring a component of enterprise banking?
Restructuring is the stock faction in the enterprise bank accountable for trading with overwhelmed, forlorn, and bankrupt defaulters. Restructuring is an advisory organization that will instruct shareholders on both aspects of the bankruptcy, both the despicable defaulter side and the usurer side.
