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A Comprehensive Guide to Restructuring Investment Banking

Investment banks provide restructuring solutions to stressed, distressed, and bankrupt borrowers, mostly referring to corporate debtors. They often represent only one side of the stakeholders due to conflicting interests of both parties. While debtors aim at maximizing their equity holders, lenders and banks have different objectives. Investment banks stay in the restructuring process to offer options to the stakeholders and help them maximize value. 

Sometimes, restructuring solutions for investment banks also include negotiating with lenders and banks to relieve the loan terms in exchange for debt-equity, equity, and incentives. Here is a comprehensive guide to restructuring investment banking.

Causes of Stress and Distress

Some causes that often cause a debtor to become distressed include:

  • Industrial or structural disruption
  • A war, geopolitical event, energy crisis, pandemic, monetary or fiscal crisis
  • Poor management decisions, like a CEO trying to expand quickly, taking too much debt, or introducing policies that harm the cash-collection cycle

Once a debtor suffers from any of these causes, circumstances push it into the category of a distressed debtor. Common signs include:

  • Missing the Interest Payment: The debtor skips an interest payment due to a lack of cash.
  • Missing the Principal Repayment: Just like skipping the interest payment, the debtor also starts missing the principal repayment. As a result, the creditor starts losing money they already invested, let alone earning the interest.
  • Violating the Covenants: The debtor has no cash. So, it starts breaking the loan covenants.
  • Falling Credit Score: Credit bureaus downgrade the debtor’s credit rating because its liquidity is worsening and credit stats are falling.
  • Declining Cash: The debtor’s margins and sales are falling. If the situation continues for some time, it will fail to pay salaries and suppliers regularly.

If these signs are pursued, restructuring solutions for investment banks provide the best possible solution to avoid bankruptcy.

Understanding the Restructuring IB Process

In the process, investment bankers advise a debtor to modify its capital structure in order to increase survival chances. These bankers also work on liquidations, distressed sales, and bankruptcies and advise creditors on different deals. Just like an M&A deal has the buyer’s and the seller’s side, distressed transactions and restructuring also have the debtor’s and the creditor’s side. An Leveraged Finance Investment Banking advises only a single side of each deal, and sometimes they focus on a specific side of all transactions.

A debtor engaging in a restructuring group may be one of the following:

Stressed: The debtor can still pay the interest but has trouble with the principal amount. It might be heading towards a financial crunch by the term’s end.

Distressed: The debtor has already missed a principal or interest payment or failed to repay by maturity. Besides, it might have violated a covenant by this stage.

Bankrupt: The debtor has entered the liquidation or reorganization process and aims at achieving the best outcome possible.

On the other side, the creditor seeking restructuring solutions for investment banks might be a bank, bondholder, mezzanine or a subordinate lender. While advising a creditor, an investment bank tries to get the best possible condition for them. It might mean the highest recovery with maximum repayment or high equity percentage.https://viralmagpoint.com/

Sometimes, changing the debtor’s capital structure is not the best solution. For instance, a retailer may need to eliminate unprofitable locations for survival. In that case, a restructuring consultant may advise the company on the best possible solution. Investment bankers will still have a role to play if the debtor requires extra capital to avoid bankruptcy. All in all, restructuring focuses on maximizing value while minimizing loss. 

The restructuring consultant must think like investors and understand the in-depth risk factors, whether they advise the debtors or the creditors. They must understand both equity and debt, along with the legal processes involved in liquidations, reorganizations, and bankruptcies. The ultimate goal is to balance each group’s needs and figure out a solution that maximizes the debtor’s survival without compromising the creditor’s yields.

Restructuring solutions for investment banks are the best answer during a recession, market crash, or downturn. If overall activities fall, distressed deals fail to compensate for the lost volume, especially when a large percentage of transactions get canceled. Those who go that route have to accept more grueling, longer hours to get out of it.

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