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Desk
Restructuring
What happens when the debt cannot be paid: the negotiation, the court, and who ends up owning what.
The desk at a glance
Restructuring is what happens when a company cannot pay what it owes on the terms it agreed. The work is a negotiation between people who have already lost something about who loses how much more, conducted under a clock and, eventually, in front of a judge.
The first thing to get right, because almost everybody gets it wrong: companies fail when they run out of cash, not when the balance sheet says they are insolvent. A business worth more than its debts can fail if it cannot pay this month; a deeply insolvent one with a committed facility can continue for years. The two questions to ask in order are how long the cash lasts and when the next maturity falls.
The second: position beats size. Two creditors owed identical amounts can receive completely different recoveries depending on which entity they lent to and what secures them. That position was fixed years earlier, in a document nobody was reading closely at the time, and it is now the whole argument.
Who does what
The company's adviser works for the company, which in this situation is not the same as working for its shareholders — and the moment it stops being the same is a question of law, not of preference.
The creditor committees — usually more than one, because senior and junior creditors want opposite outcomes. Each appoints its own advisers, and each set of advisers is paid by the company.
The distressed funds that bought the debt at a discount. Their economics are entirely different from a bank that lent at par, and so is their willingness to take equity instead of cash — see the debt-for-equity swap.
The new-money providers — whoever funds the next months, usually with priority over everybody else. This is the position everyone fights for, and the fight is often not about value but about who is allowed to hold it. See debtor-in-possession financing.
The court, which does not decide who is right about value but does decide whether the process was fair, whether classes were properly constituted and whether dissenters are worse off than in the alternative.
What decides whether this desk is busy
Six mechanisms, each with the direction it pushes in and the thing to watch. None of them is a forecast, and none is a number that goes out of date.
What
Which way it pushes
What to watch
Liquidity, not solvency
Companies fail when they run out of cash, not when the balance sheet says so
A business worth more than its debts can still fail if it cannot pay this month. Conversely a deeply insolvent company with a committed facility can continue for years. Watch the cash runway and the next maturity, in that order.
Where the debt sits in the structure
Position decides outcome more than headline amount does
Two creditors owed the same amount can receive completely different recoveries depending on which entity they lent to and what secures them. Structural position is the whole argument in most restructurings, and it was fixed years earlier.
What the documents permit
The contract written in good times governs the bad ones
Whether assets can be moved beyond existing lenders' reach, whether new money can rank ahead, and what a majority of holders can impose on a minority are all in the credit agreement. Restructuring is largely the reading of that document under pressure.
Who holds the paper now
The original lenders are frequently gone
Debt trades. By the time a restructuring begins, the holders are often funds that bought at a discount and whose economics differ entirely from a bank that lent at par. Their preferred outcome is different, and so is their willingness to take equity.
The availability of new money
Whoever funds the next months usually sets the terms
Rescue financing is scarce and it is priced accordingly — often with priority over existing debt. This is why the fight in a restructuring is frequently not about value but about who is allowed to provide the new money.
The forum, and who can be bound
A court can impose on dissenters what a negotiation cannot
Out of court every creditor can refuse. Inside a formal procedure a sufficient majority can bind the rest, subject to tests the court applies. The choice of procedure is therefore a choice about which minorities can be overruled.
The calendar this business keeps
Every desk has a rhythm its regulars plan around and a newcomer discovers by being surprised by it.
When
What happens
Why it matters
The covenant breach, or the missed payment
The moment the balance of power changes
Up to here management runs the company. After it, creditors have rights they did not have the day before, and the negotiation starts from a different place.
The standstill
Creditors agree not to enforce while a plan is negotiated
This buys the only thing that is genuinely scarce: time. It is also the point at which creditors organise into groups and appoint their own advisers, which changes the shape of every later conversation.
The information period
Creditors receive a business plan and test it
Value is argued from a forecast, so the forecast is the battleground. Whoever's valuation the process accepts has largely decided who is in the money and who is not.
The vote, by class
Majorities are counted within classes, not across all creditors
How creditors are grouped into classes decides which majorities are needed and therefore who has a veto. Class composition is litigated for precisely this reason.
Sanction, and then implementation
A court checks the process before the plan binds anybody
The tests differ by jurisdiction but the shape is common: were classes fairly constituted, were creditors properly informed, and is a dissenting class no worse off than in the alternative.
How this desk reaches the rest of the site
The deals and the instruments are one subject. These are the corridors — each one a mechanism, not a resemblance.
The whole argument is a valuation dispute with legal consequences: whoever is above the value break gets paid.
What the client is actually paying for
Restructuring advisers are usually paid a monthly fee plus a completion fee, and the monthly fee matters far more here than on any other desk — these processes run for months or years, and a fee structure loaded onto completion would pay an adviser to reach any deal rather than the right one.
The company typically pays the advisers of the creditor groups as well as its own. That looks strange and is deliberate: creditors who cannot afford advice cannot negotiate, and a plan negotiated with unadvised creditors is a plan a court is more likely to refuse.
The largest cost is not the fees. It is the value that leaves while the argument runs — customers who go elsewhere, staff who leave, suppliers who shorten terms. Every month of delay is paid for out of the recovery everybody is arguing about, which is the strongest argument for an out-of-court deal and the reason most restructurings attempt one first.
Execution decides 6 of the 9 — which is most of the desk. Diligence decides none of them here — which does not mean it is absent, only that it is never the thing a transaction on this desk turns on.
The documents, in the order they appear
The reservation of rights letter — a creditor saying it is not waiving anything by continuing to talk. The first sign that the relationship has changed.
The standstill agreement — creditors agree not to enforce for a period. This buys the only genuinely scarce thing: time. See the standstill.
The independent business review — a forecast prepared for the creditors rather than by the company. Value is argued from a forecast, so the forecast is the battleground.
The lock-up agreement — creditors who have agreed the plan commit to vote for it. The percentage locked up before a plan is launched is the best available prediction of whether it will pass.
The plan or scheme document — what each class receives, and the comparison against what it would get in the alternative. See the scheme.
The court sanction — the tests differ by jurisdiction but the shape is common: fair classes, informed creditors, no dissenting class worse off than in the alternative.
Run the numbers
Interactive: how far earnings can fall before a covenant breaksMedium
Headroom is not a number a lender publishes. It is how much of this year's earnings can disappear before the first test fails, and it is usually smaller than the board thinks.
Leverage now
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Interest cover now
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Earnings needed for the leverage test
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Earnings needed for the cover test
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Headroom
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First to break
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Reading
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Covenants are tested on a defined EBITDA over a defined period, with add-backs the agreement lists. Every one of those definitions moves this number. Information and education only. Not advice, not a valuation, and not a quote for anything.
Interactive: who gets what, and where the fulcrum sitsMedium
Value runs down the stack until it runs out. Wherever it stops is the fulcrum, and whoever holds that claim owns the outcome — whatever the old share register says.
Senior recovery
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Subordinated recovery
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Unsecured recovery
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Left for the shares
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Consumed by the process
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The fulcrum
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Reading
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Strict seniority, one pool of value, no inter-creditor terms and no priming. Real outcomes depart from this, and the departures are the negotiation. Information and education only. Not advice, not a valuation, and not a quote for anything.
How it goes wrong here
The value break is disputed and nobody blinks. Whoever is above the break is paid and whoever is below is not, so the valuation argument is an argument about existence rather than about price.
A creditor group finds a document permission nobody expected — assets moved beyond the reach of existing lenders, or new debt ranking ahead. Legal for the party that did it; catastrophic for the party that did not read the clause. See uptiering and drop-downs.
New money cannot be agreed, and the company runs out of cash mid-negotiation. The plan becomes an insolvency.
Classes are constituted in a way the court refuses, and months of negotiation have to be redone.
The business deteriorates faster than the process moves. The most common ending, and the least discussed.
Concepts to master
The value break — the point in the capital structure where the enterprise value runs out. Above it, creditors are paid; below it, they are negotiating for option value.
Structural subordination — lending to a holding company puts you behind everybody who lent to the operating company, whatever your documents say about seniority.
Cram-down — a sufficient majority, in a formal procedure, can bind a dissenting minority or even a dissenting class. Choosing the forum is choosing which minorities can be overruled.
New money buys priority, and priority is worth more than the money.
Recovery is what the credit market prices every day — see credit and the credit default swap, whose settlement depends on exactly what happens here.