Restructuring Corporate Assets and Liabilities

Prof. Ian Giddy, New York University
What is Corporate Financial Restructuring?

Corporate financial restructuring involves any substantial change in a company’s financial structure, or ownership or control, or business portfolio, designed to increase the value of the firm. In today's market, proper restructuring of stressed assets and liabilities may allow good companies to survive.

The Course

This course will be taught around several major topics employing in-depth group work on restructuring, using corporate finance principles, case studies and deal analysis. The subject is more relevant than ever in today's stressed capital markets. The focus will be on identifying situations that call for nonstandard corporate finance ideas – how to meet the challenge of restructuring a company’s operations, assets and funding – and the design and pricing of situation-specific refinancing solutions. Examples of such situations include stress-induced financial restructuring, recapitalizations, debt-equity swaps, divestitures, business rationalization and refocusing, and negotiated reorganizations. In many cases resolving these issues will require exchange offers and the design of debt, equity and mezzanine financing techniques in order to resolve particular issuer or investor problems that cannot be solved by conventional methods.

Students will Learn About

    •    Intervention by a new owner: integrating corporate goals into finance
    •    How to implement the "five key disciplines of corporate finance"
    •    How to revamp a company's leverage, credit quality, market risk, and liquidity
    •    Financial restructuring: how to use subordinated, mezzanine and equity-linked financing instruments
    •    Business restructuring: when growth through acquisitions pays off – and when divestitures or asset sales make sense
    •    Control restructuring: ownership dispute, transition and exit: financial choices
    •    Distress restructuring: bankruptcy and its alternatives
    •    When and how to exit a business
    •    And more...
We will seek to identify companies with sound underlying businesses, which are struggling because they have too little cash flow to support their nominal debt. We then have to determine how much the company is worth, and examine how its debt is structured – as leveraged groups invariably have different classes of debt, each with its own place in the creditors' pecking order. How can the liabilities and assets be restructured? Who will lose? Who will break even? Who will eventually gain control?

Preliminary Course Outline
Topics

Tough Times: Employing the Disciplines of Corporate Finance

  • The Restructuring Framework
    • Proactive
    • Defensive
    • Distress
    • Applications in financial services, property and manufacturing industries
  • Match the Solution to the Problem
    • The financing needs fixing: recapitalize equity, debt-equity swap, sell assets, restructure debt
    • The assets need fixing: restructure the business or divest the division
    • The company needs fixing: change of management, control and/or ownership
  • Case study: Goldfield Corporation. What problem? What solution?
  • Restructuring Debt, Equity and Assets to Create Corporate Value
    • Look at  the fundamental characteristics of the business before looking at the finance
    • What are the strong and weak points of the company?
    • The five principles of corporate financial restructuring: investments, acquisitions, financing, payback and risk management
    • Managers’ vs. shareholders’ vs. lenders' interests: the agency problem
  • Case study: Tradeshow Planning: a company in distress. What is the business, and what is the source of the problems?
  • A Roadmap for Restructuring Choices
    • The leverage flowchart
    • Choices for restructuring assets
    • Choices for restructuring liabilities
    • Choices for restructuring control
  • Case study: Tradeshow Planning: finding a solution. Asset or liability restructuring? Is management the problem?
  • Finding a Solution
    • Interactive: What is the company doing right? What should we do differently?
    • Matching refunding choices to corporate finance principles
    • Restructuring incentives: making management equity sweat – and making restructuring worthwhile
    • Post-restructuring exit planning
Leverage and Capital Structure
  • What is the "optimal capital structure" in today's credit market?
  • Too little cash -- and too much
  • The logic of private equity and leveraged buyouts
    • Too much leverage – and too little
    • “Equity is a cushion; debt is a sword”
    • Case study: Nukem Security Services. How can one employ leverage to effect a management buyout of this company?
    • Debt capacity analysis
  • Deleveraging: cost-benefit evaluation
  • Case study: Asia Aluminium. A debt repurchase proposal
  • The leverage flowchart
  • Case study: Taca Aviation. Acquisitions or asset sales? Lease finance, corporate debt or deleverage?
  • Restructuring incentives: making management equity sweat – and making it rich
  • Interactive session: what are we doing right? What could we do differently?

Restructuring the Business

  • Acquisitions: did they create corporate value – or destroy it?
    • How a well-run company evaluates acquisitions
    • Examples: ISS and Berkshire
  • M&A synergies: revenues, costs or control? (A flowchart)
    • Revenue restructuring
    • Cost restructuring
    • Control-based-restructuring
  • Asset sales and corporate divestitures: when and why?
  • Case study: The New York Times. Using sale-leaseback to sell your headquarters building
  • Selling a business division: opportunities, methods and valuation
    • When and why?
    • Methods and tax effects?
    • Post-divestiture valuation
  • Case study: PPR and Finaref. Why sell the finance unit? To whom?
  • Group work on divestiture analysis

Restructuring Financial Risk Management

  • Can the company’s CFO predict currencies, rates or commodity prices?
  • Is the company a business – or a bet?
  • What to look for in the company's financials
    • Interest rate risk: hedging instruments
    • Dealing with currency risk: Oligarch Supermarkets 
    • Dealing with commodity price risk: Susan Oil & Gas 
  • Case study: Houston Natural Gas Exploration. Should management accept Jana’s recommendation to forego acquisitions and do a share buyback?
  • Conclusion: returning to the fundamental principles of hedging and risk management

Restructuring the Financing

  • Senior Secured Bank Loans
  • The amazing disappearing covenant
  • Second-lien secured loans
  • Case study:
  • Loans and Equity Investments Gone Wrong
    • Debt buybacks
    • Stressed restructurings
    • Workouts: restructuring the pricing and terms
  • Financial Distress and Restructuring
    • Valuation of a company in distress: before-and-after analysis
    • Case study: Deaths “R” Us. How will a forced debt-for-equity exchange improve this company’s survival prospects?
  • Using the Techniques of Mezzanine Finance for Financial Restructuring
    • Explanation of mezzanine and equity-linked financing instruments
    • Subordinated debt, convertibles and warrants
    • The ups and the downs of convertible bonds
    • Case study: deCode Genetics. A life sciences company faces a refinancing crisis
Structuring Mezzanine Finance

  • High yield bonds
    • The good, the bad and the ugly
    • Case study: It Hertz
  • Pay-in-kind notes
  • Subordinated debt with warrants
  • Case study: Pricing and structuring a mezzanine note
  • Performance-linked participation debt: an alternative form of mezzanine
    • Setting targets and linking payout to performance
    • Discussion of appropriate linkage: turnover, cash flow or profit?
  • The Mezzanine Matrix (the when and why of subordinated and equity-linked finance)
  • Building Materials case study. Recession-related mezzanine management

Facing Bankruptcy and Reorganization

  • Liquidation, sale, or debt restructuring?
    • Negotiated settlement vs. merger vs. legal reorganization
    • Role of vulture investors
    • Example: Gaining Control of Masonite. Oaktree Capital buys the debt of a leveraged buyout gone sour
    • “Prepackaged” bankruptcy
    • Debtor-in-possession financing
    • Post-bankruptcy reorganization
    • If all fails: allocation of liquidation proceeds
      • Case study: Linens ‘n Things. Who got what?
  • Conflicting Interests and Views
    • Shareholders versus lenders
    • Lenders versus lenders
    • Case study: Watamess Telecom. Group work on problem identification, valuation and restructuring the company's financing and control 

Restructuring the Control
  • Ownership dispute, transition and exit: financial choices
  • The option of equity investors' recapitalization
  • Case study: Sanjay Cement. How do we fix the control and regain value?
  • Giving up control: at what price? What is the company worth?
  • What are the exit options?
  • Case study: Restructuring Ownership of Simmons
  • Conclusion: when to buy; when to restructure; and when it’s time to sell

Review of the Restructuring Roadmap

Resources
Articles, Case Studies and Books
TBA

Useful Links
TBA


About the Instructor
Dr. Ian Giddy, born in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over 45 countries worldwide for the past three decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in North and South America, Europe, Asia, the Middle East and Africa. As a lecturer, banker and consultant he has been involved in the growth of the structured finance market in the USA, Europe and Asia. He currently serves as the independent Risk Manager for Credit Renaissance Partners, an investment group. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide, as well as many short articles on finance and conservation biology. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica.
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