Restructuring Investment Banking - How To Get in and What You Do

9/30/2016
Restructuring Investment Banking: How to Get In and What You Do
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The Restructuring
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by Luis Miguel Ochoa

22 Comments | Investment Banking - Product Groups
A broken
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and a determined reader, pursuing expertise inrestructuring.
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This is not just another industry or product group article.

http://www.mergersandinquisitions.com/restructuring-investment-banking/
1/18
9/30/2016
This is:
The Restructuring Zone.
Normally, restructuring investment banking is known as a
standalone group but every now and then it may be
combined with other groups.
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At one firm, the team is known as Financial sponsors,

restructuring, and leveraged finance (I guess the common
theme is debt).
What you actually do in a restructuring, reorganizationor

recapitalizationfunction.
Market conditions that lead companies into restructuring.

Typical assignments, and advising the debtor vs. the
creditor.
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Heres what well tackle as we drive pastthe goal posts in the

Restructuring Zone:
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Restructuring-specific analysis and financial modeling.

How to turn around a failing business if you can.
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Pre-Apocalyptic Times: A Brief Introduction

Q: So howd you get started in Restructuring?
A: I actually joined a well-known group via on-campus
recruiting.
But a lot of bankers end up here a er working in related groups,
such as Leveraged Finance or M&A;you join our group because
you decide you want to work on more complex or unusual
deals.
Q: Great. So what does your group actually do, at a high level?
A: Mainly valuations, operations forecasting, and liquidity
assessments.
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The team can also assist with financing, such as for debtor-inpossession (DIP) financing, but for the most part we focus on
2/18
9/30/2016
the 3 items I just mentioned.
Q: On that note, what leads to these restructuring

assignments in the first place?
A: The need to restructure to dramatically change a
companys capital structure and/or operations in order to
survive o en comes up when:
A market heads toward a structural downturn where

companies must radically change their business model in
order to survive(ex: typewriters, film for cameras, a brickand-mortar bookstore opens an online page to sell books, a
chain of video rental stores opens on online channel to
deliver video rentals).
A sponsor-owned portfolio company becomes unable to
meet interest payments and required principal
repayments. In most cases, the company was acquired in a
leveraged buyout (LBO) during a frothy market, and then the
market crashed or the companys business took a turn for
the worst immediately a er.
A company raises debt when theres a window of
opportunity (read: decides to raise debt just because
comparable firms are raising debt), but is unable to service
its debt commitments later on.
Youll o en see discussions of these conditions in thepitch
books written by restructuringinvestment banking teams.
On a more granular level, theyll discuss points like the market
demand for a companys products/services and changes in the
underlying raw materials costs, and theyll use those points to
explain why the market suddenly shi ed (these areas are
typically covered by acoverage team).
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Understanding debt is critical for all the analysis in this group:

it explains why companies get into trouble, and what they can
do to get out of trouble.
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Q: So those are the trends that lead to restructuring what

about specific catalysts, though?
What events make a firm green light a restructuring process
and hire bankers?
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3/18
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A: Here are the most common events:

Credit rating downgrade (e.g., the company was rated A by
S&P and then it gets downgraded to BBB or BBB- or
likely something worse than that).
The companys customers start delaying payments, or cash
collection becomes more di icult (e.g., Accounts Receivable
Days doubles within a quarter).
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Limits established by debt covenants are exceeded (e.g., Net

Debt / EBITDA cannot exceed 4x but then it increases to 5x or
6x in one quarter).
In some cases, a company can be saved, but in other cases, a

liquidation or a distressed sale might be the only viable
alternative.
Q: And what if I dont want to go through with the
restructuring process?
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A: You could always bet on multiple expansion, but I

recommend against that one unless you can time travel back to
the 1999 stock market
Q: Good point finally, where do new restructuring clients
come from?
A: O en, they come from industry coverage teams. I have seen
cases where the deal team consists of just a solesenior
coverage banker, plus a much larger restructuring team.
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This is because the restructuring process does not require as

much sector coverage as a capital raise or advisory assignment
would call for.
Articles & Interviews
The Restructuring Landscape: Who Wins at the End of the

Game?
Cost of Capital
Q: In another restructuring article, we mentioned that

Blackstone, Lazard, and Houlihan Lokey were some of the top
investment banks in this area.
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The decision to restructure is based on a companys leverage

and coverage ratios.
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4/18
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But what makes a top restructuring team, and what do you

need as an adviser?
A: Rapport and empathy. A lot of investment banking
professionals claim their work is on the clients behalf, but there
are o en conflicts of interests similar to the principal vs. agent
dynamic in the insurance sector.
So when a management team picks restructuring bankers, its
based on the lack of conflicts of interest, the quality of the work
the team has done in the past, and how comfortable executives
are with the bankers.
Just like there are buy-side and sell-side M&A deals, there are
creditor and debtor deals in restructuring. If youre advising the
management team of a company, theyll almost always prefer
teams with more debtorexperience.
If youve mostly advised creditorsin the past, you wont have as
much insight into companies operations (which directly factors
into the all-important short-term cash flow projections you
o en create in this industry).
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Some of it also comes down to the teams expertise.
Q: On that note, what are the typical assignments given to

restructuring teams?
A few examples:
Chapter 7 Assignments: These involve a lot of valuation
work, which we can discuss later, but essentially you help
the company sell o its assets to pay creditors.
Chapter 11 Assignments: Here, you help the company to
change the terms of its debt, possibly raise new debt, and
renegotiate to stay afloat and eventually repay its creditors.
Out of Court Assignments: These let a company avoid (or
postpone) a formal bankruptcy filing and they reduce
operational disruption, but the company also loses some
flexibility and negotiating leverage.
Creditor Assignments: You put on your due diligence hat
and look for reasons the company will not be able to pay o
its debt. These items are frequently related to cash flow
5/18
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generation, such as contracts to customers or even labor

agreements.
There are other deal types for example, restructuring
assignments o en turn into sell-side M&A deals or debt or
equity raises, but youve covered those before.
And there are other possible outcomes as well, such as a
Section 363 asset sale (a faster / less risky form of a normal
asset sale), as well as general assignment (a faster alternative
to bankruptcy).
Q: And what do you do as an analyst or associate when
working on those deals?
You know how the advisory (read: mergers and acquisitions)

team has a database of precedent transactions?
This is the restructuring equivalent.
You keep track of the terms, including covenants, for companies
in your universe and current and potential clients.
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A: The most basic assignment is reading through a list of the

companys credit agreements and keeping track of the terms
(sometimes called an indenture analysis).
This is by far the most common work assignment no matter the

group or role.
Beyond this, in debtor mandates you focus on telling (read:
rewriting) the clients story and demonstrating that the
company can continue to operate and pay o its debt.
And then you use that information to help it renegotiate with
creditors, or to sell itself if things dont go as planned.
In creditor mandates, youre more critical and you find reasons
why the group of creditors youre representing should get their
capital back which o en involves pointing out why the
company is likely to default on its obligations.
Corporate Valuation Meets Financial Modeling
Q: How do you think about valuation when youre
representing a debtor and youre trying to present its story as
6/18
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favorably as possible?
A: You can still use the same valuation methodologies: public
comps, precedent transactions, and the Discounted Cash Flow
(DCF) but there are some di erences.
For one, you may attempt to adjust the companys expenses if
some of them are higher / lower than they would be for a
normal company (whether or not potential buyers and
creditors accept this is a di erentstory).
Items like Operating Working Capital in a DCF o en need to be

adjusted because receivables are less likely to turn into cash,
there might be excess inventory, and so on.
You tend to focus on Enterprise Value-based multiples because
distressed companies equity is o en worth disproportionately
less.
You may even have to adjust Enterprise Value ifthe potential
buyer isacquiring only selected assets and assuming only
selected liabilities of the seller.
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Sometimes companies have trouble receiving volume discounts

when theyre undergoing financial troubles, so you might see
elevated Cost of Goods Sold (COGS) which you might argue
should be adjusted downward.
And then theres the Liquidation Analysis, where you assume

that all the companys assets are sold o to pay for its liabilities.
You assume some type of Recovery Factor for each Asset by
estimating how much it could be sold for, and you multiply that
Recover Factor by the book value of the asset.
So cash might be 100%, but AR from customers delaying their
payments might only get a value of 60-80%.
Something like PP&E might actually be stepped up from its
book value, while the value of Other Intangible Assets would
vary widely (Goodwill is usually assumed to be worth $0).
Then you multiply and add up all those values, andassume
that the proceeds are used to repay the liquidation-related
expenses, then the senior creditors, then the next most senior
creditors, and so on until nothing is le .
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Youll look at a range of Recovery Factors for each asset to see

how much creditors receive under di erent scenarios.
Note: You would not actually use the Liquidation Analysis in
marketing material for the company its more for internal use,
bankruptcy filings, and negotiations with creditors.
Q: Thanks for that detailed explanation.
Beyond the Indenture Analysis and the Liquidation Analysis,
what else is common?
A: Sure there are a few others Ill mention here:
Youll also list information like the pricing, maturity date, and
market value of each tranche of debt.
This analysis is used for prospecting and seeing which
companies may soon need your services as a restructuring
advisor.
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Capital Structure, Leverage, and Coverage: This is pretty

simple you just look at traditional metrics such as the
leverage ratio, interest coverage ratio, cash interest coverage
ratio, and so on.
Bond Pricing and Yield Analysis: This one is used to calculate

the implied return to bond investors based on di erent holding
periods and redemption dates.
And then based on that yield, you figure out the implied bond
prices.
You can also create a make-whole analysis where you
calculate how much bondholders need to be compensated for
early redemption of the bonds (based on the NPV of payments
they lost out on due to the redemption).
You use these numbers to negotiate with creditors.
Covenant Analysis: Just like how youd calculate normal credit
metrics such as Debt / EBITDA and EBITDA / Interest in an LBO
model and then highlight violated covenants with conditional
formatting in Excel (Alt + H + L), you do the same thing here.
8/18
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One di erence is that you may calculate a cushion and a

cushion % as well.
For example, if the maximum Debt / EBITDA is 4x and the
company has $400 million of debt and $120 million of EBITDA,
thats a cushion of $20 million in EBITDA before it hits the
limit.
These numbers are used to advise a company on its options,
determine if it can cut costs to save itself, or if it has to
actually restructure its debt commitments.
The key output is the Total Availability in other words, if a

company has a $100 million Revolver, how much of that is
available at any given time to cover cash flow shortfalls?
And when does that availability imply that the company will
need to raise additional funding?
So if the company can draw on $50 million of its Revolver and
its burning $5 million in cash per month, it will need to raise
additional funding within the next 10 months.
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Liquidity Analysis: Not to be confused with a Liquidation

Analysis, in this one you project a companys cash flows on a
quarterly or monthly basis and track how its cash balance
declines over time.
Just like in a DCF, this analysis comes down to EBITDA, interest

expense paid on theRevolver and other existing debt, taxes,
Capital Expenditures (CapEx), and Working Capital
requirements.
Recovery or Hurdle Analysis: This is similar to the Liquidation
Analysis, except now you assume that the company gets sold
for a multiple of EBITDA rather than selling o its individual
assets and then uses the proceeds to repay its creditors.
The idea is: What do EBITDA and the EBITDA exit multiple need
to be for the di erent classes of creditors to be repaid? Whats
the maximum recovery creditors can expect?
So youll see sensitivities with EBITDA and EBITDA multiples,
with the implied recovery % to (unsecured) creditors in the
middle of the table.
9/18
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Example: The company has EBITDA of $200 million and gets

sold for 5x EBITDA.
It also has a Revolver of $100 million and a Term Loan A of $200
million, with Unsecured Senior Notes of $1 billion.
In this case, the secured creditors get a recovery of 100%
because the proceeds of $1 billion can be used to repay the
Revolver and Term Loan A in full.
But then only $700 million is le for the Unsecured Senior Note
investors so their implied recovery is only 70%.
Debt Capacity Analysis: Very similar to the Covenant Analysis,
except now youre looking at the leverage and coverage ratios
of peer companies and using those to figure out how much
debt the company should be able to take on.
Q: I hope everyone is taking notes.
You also mentioned multiple expansion as highly unlikely in
the beginning, but if it happens, where does it come from?
A: Multiple expansion is sort of like identifying a four-leaf clover:
it is di icult to achieve, but certainly not impossible.
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Sometimes you see it a er management completes certain

actions:
They focus on core competencies by selling product lines or
entire business units.
They increase operating e iciency through a reconfiguration
of human capital,fixed assets, and operating working capital
improves.
Other times, it happens if the market itself starts performing
better or if external factors like government policy changes
result in more money flowing in.
Bankers: Do They Add Value, or Straight-Up Create It?
Q: Whats the point of hiring a restructuring and
reorganization advisor?
10/18
9/30/2016
Couldnt a company just hire the Leveraged Finance and

Mergers & Acquisitions teams?
A: The value-add is that restructuring requires a much more
specialized skill set.
You do need to understand debt and transaction models, but
you also need to understand how to do all the analyses I
mentioned above, how to negotiate with creditors, and how to
tell a turnaround story for a struggling company.
Plus, restructuring operates within a legal framework, and even
as a banker you need to understand it whereas legal
knowledgewould be less important in LevFin or M&A.
A: Yes, though sometimes its not possible and a liquidation is

the end result.
If they do help the company turn around its operations, they do
so by advising them on cost-cutting measures, ways to sell o
non-core assets, or helping them raise equity or debt or
Debtor-in-Possession (DIP) financing (which has repayment
priority over other forms of debt) to stay alive while
reorganizing.
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Q: Can restructuring advisors actually save a companys

business?
Its always subjective how much value bankers add, but in my

opinion they add a lot more value in distressed situations than
they do in plain-vanilla sell-side M&A deals.
Q: And where do distressed bankers go a er saving failed
companies?
A: Credit investment funds, debt funds, and distressed investing
are the major exit opportunities.
It is somewhat di icult to move from restructuring to sector
coverage.
Its a lot easier to move from restructuring to Leveraged
Finance, or to move into any group that is more credit-oriented.
Q: Any final words?
11/18
9/30/2016
A: Restructuring is usually a method of resort.

Always try a turnaround before you proceed with an o icial
restructuring! (Note:My group might not endorse that
statement)
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About the Author

Luis Miguel Ochoa has worked in investment banking for several
years covering the industrial sector. In addition to being an avid
mentor for his alma mater, he volunteers for the Association of
Latino Professionals in Finance and Accounting. In his spare time,
he enjoys fencing and attends networking events in New York. He
graduated from Stanford with a BA in Economics.
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22 Comments to The Restructuring Zone: Banker Meets
Lawyer and Gets Married in a Shotgun Wedding?
Manny
Hi B, from the above it seems like a consulting job. What r
actual di rerences and why would a company prefer to
13/18
9/30/2016
hire restructure banker as opposed to a consultant

REPLY
M&I - BRIAN
A consultant doesnt advise on deals, although

there are similarities. So a company that needs to
change its capital structure around or renegotiate
terms of its debt or potentially sell itself would not
hire a consulting firm. Consulting firms also take
much longer to complete assignments, whereas a
lot of these deals are finish it ASAP or the
company dies.
REPLY
Al
Is it possible to break in to restructuring groups coming
from a big 4 valuation modeling group? I literally sit
across from our Rx group but the barriers to work in that
group are high in terms of transferring. I am a CPA with an
MSF. Part of the exam included tax and legal bankruptcy
and debtor creditor issues. Would that help in interviews?
REPLY
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M&I - BRIAN
Yes, its possible to transfer in but not necessarily

easy, though the tax/legal knowledge you have will
help. Related:
HTTP://WWW.MERGERSANDINQUISITIONS.COM/BIG-4RESTRUCTURING-TO-INVESTMENT-BANKING/
REPLY
Al
Thanks Brian. Any hopes for Rx modeling
lessons coming soon?
REPLY
M&I - BRIAN
Probably not until next year or late

this year, if at all.
REPLY
14/18
9/30/2016
Manny
Thanks Brian
REPLY
Distressed Banker
Excellent article. I had a minor observation: for the
question But what makes a top restructuring team, and
what do you need as an adviser?, in the final two
paragraphs of the response you have debtor and creditor
the wrong way round, i.e. companies prefer to hire teams
with more debtor experience ;)
REPLY
M&I - BRIAN
REPLY
Manny
Hi Brian, in times of low economic activity, how does the
restructing team fair in terms of layo s? i.e are they the
Get Notifications
Thanks! Just fixed that.
first to be laid o in the entire bank ?

REPLY
21stcenturycfo
When restructuring / BK activity is low, M&A
activity is high. Someone at Deloitte told me that
they move these team members back and forth,
depending on which way the markets going. The
skill sets are, in many ways, interchangeable.
REPLY
M&I - BRIAN
What he said you will likely be transferred or reassigned, but wont necessarily be laid o .
REPLY
Liam
15/18
9/30/2016
Unrelated to this article but I figured I would get a quicker

response this way would you say that an unpaid
internship is any easier to get than a paid one? Im
considering cold-contacting several MM/boutique firms in
London about working for free (although not for too
long) just to get some extra experience and networking
opportunities. What are my chances of getting something
along these lines in comparison to a paid(/unpaid)
internship at a BB? Will there really be any di erence?
REPLY
M&I - Nicole
It may seem so logically but this isnt always the
case. I think it is easier to get an unpaid internship
at those places because they are less structured.
Even if you o er free service, BB may not take you
because (a) many have probably volunteered (b)
HR policies (c) legal issues (d) they may not have
that need
HTTP://WWW.MERGERSANDINQUISITIONS.COM/UNPAIDFINANCE-INTERNSHIPS-JOBS/
REPLY
Get Notifications
Liam
Yes that makes sense now that Ive read that
article. A couple more questions:
1) Do you know anything about firms that
guarantee you an internship for a fee? e.g.
city-internships and others? Ive seen some
students sent to HFs and PEs and most of
them run the programs at cost, but im
dubious
2) In relation to that article, what sort of
firms could you intern with that may still
have some relation to finance? Would
economic/financial think tanks, market
research and financial services providers be
any good? e.g. bloomberg, reuters, markit
etc..
REPLY
16/18
9/30/2016
M&I - Nicole
1. It really depends on your situation.
If you are interested in the program,
you may want to contact the
program directors directly. We also
partner with NYSF, one of the firms
you mentioned. For more
information, please go to:
HTTPS://BREAKINGINTOWALLSTREET.COM/BIWS/NYSF/
2. Financial service providers like

Bloomberg and Reuters can help
REPLY
George C
Has to be one of the best interviews youve done. The
level of detail is brilliant. You should have all your
interviewees go into this much depth! Job well done.
REPLY
M&I - Nicole
Were glad you enjoyed the article! Thank you for
your compliment.
Get Notifications
REPLY
airic
no comp? booooo
REPLY
M&I - BRIAN
Similar to other groups at the junior levels senior

levels are highly variable based on deal flow and
such.
REPLY
DarthVader
Amazingly helpful article
REPLY
M&I - BRIAN
17/18
9/30/2016
Thanks for reading!

REPLY
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9/30/2016

Restructuring Investment Banking: How to Get In and What You Do

MERGERS & INQUISITIONS

Search this website

by Luis Miguel Ochoa

This is not just another industry or product group article.

Restructuring Investment Banking: How to Get In and What You Do

Investment Banking Resume

At one firm, the team is known as Financial sponsors,

What you actually do in a restructuring, reorganizationor

Market conditions that lead companies into restructuring.

Heres what well tackle as we drive pastthe goal posts in the

Restructuring-specific analysis and financial modeling.

BREAKING INTO WALL STREET

Pre-Apocalyptic Times: A Brief Introduction

View Course Details

Restructuring Investment Banking: How to Get In and What You Do

the 3 items I just mentioned.

Q: On that note, what leads to these restructuring

A market heads toward a structural downturn where

View Course Details

Understanding debt is critical for all the analysis in this group:

View Course Details

SEE ALL COURSES

Coaching & Resume Editing

Q: So those are the trends that lead to restructuring what

Restructuring Investment Banking: How to Get In and What You Do

A: Here are the most common events:

Limits established by debt covenants are exceeded (e.g., Net

In some cases, a company can be saved, but in other cases, a

Resume & Cover Letter

A: You could always bet on multiple expansion, but I

This is because the restructuring process does not require as

Articles & Interviews

The Restructuring Landscape: Who Wins at the End of the

Q: In another restructuring article, we mentioned that

The decision to restructure is based on a companys leverage

Free YouTube Videos

Business School, GMAT &

Restructuring Investment Banking: How to Get In and What You Do

But what makes a top restructuring team, and what do you

Some of it also comes down to the teams expertise.

Q: On that note, what are the typical assignments given to

Restructuring Investment Banking: How to Get In and What You Do

generation, such as contracts to customers or even labor

You know how the advisory (read: mergers and acquisitions)

A: The most basic assignment is reading through a list of the

This is by far the most common work assignment no matter the

Restructuring Investment Banking: How to Get In and What You Do

Items like Operating Working Capital in a DCF o en need to be

Sometimes companies have trouble receiving volume discounts

And then theres the Liquidation Analysis, where you assume

Restructuring Investment Banking: How to Get In and What You Do

Youll look at a range of Recovery Factors for each asset to see

Capital Structure, Leverage, and Coverage: This is pretty

Bond Pricing and Yield Analysis: This one is used to calculate

Restructuring Investment Banking: How to Get In and What You Do

One di erence is that you may calculate a cushion and a

The key output is the Total Availability in other words, if a