Restructuring investment banks are product groups in investment banks responsible for handling stressed, bankrupt, or distressed debtors. Most of the time, restructuring refers to corporate debt. However, sometimes, governments also go bankrupt at national or municipal levels. This is when investment banks advise stakeholders on both distressed borrower and creditor sides. However, restructuring solutions for investment banks represent the group’s one side only due to conflicting interests. Their primary purpose is to make the stakeholders aware of all the steps and options to maximize value. Besides that, they renegotiate with lenders and banks to relieve the debt terms.
Let’s know more about restructuring investment banks and their functions.
An Overview of Restructuring Investment Banks
Restructuring investment banks are product experts proficient in the technicalities and dynamics behind debt restructuring. These are technical product groups in investment banks similar to conventional M&A focused on assumption precision. A restructuring investment bank’s toolkit includes components like credit analysis, legal documentation, leveraged finance, and negotiation experience. Their services include expert restructuring solutions for investment banks related to:
- Private debt
- Equity raising
- Recapitalization and restructuring
- Liability management
- Distressed M&A
- Expert testimony
Times When Restructuring Becomes Necessary
Financial restructuring becomes necessary when debtors have outstanding obligations that make debt repayment difficult. In that case, the restructuring advisors suggest changing the capital structure to make it appropriate for more manageable repayment.
A company may become distressed because of industry disruptions, external shocks, or poor management. When stressed, the catalyst may start negotiating capital restructuring to decrease pressure from the creditors.
What Do Restructuring Investment Banks Do?
These are a few restructuring solutions for investment banks:
Identifying the Cause of Distress: Structural or industrial disruption, a macro shock like a war, geopolitical event, energy crisis, or pandemic, and poor management decisions are the most common causes of financial distress in an organization.
Looking for Signs of Distress: Once a debtor starts entering into distress due to these reasons, they show signs that the restructuring advisor might identify. Common signs include:
- Missing interest payment: The debtor lacks the finances to pay bond interests. So, it starts skipping it.
- Missing principal payment: Due to lack of finance, the debtor starts missing principal payments too. It is a more dangerous situation for the creditor.
- Violating covenant: Falling capital leads to declining EBITDA. As a result, the debtor violates covenants.
- Declining credit rating: The credit bureaus reduce the debtor’s credit rating due to worsening ratios and credit stats.
- Reducing cash balance: The debtor’s margins and sales fall, failing to make payrolls and suppliers’ payments on time.
Offering Possible Solutions: A company in financial distress has several options that a restructuring investment bank may recommend based on the deal type:
- Repayment: The advisor calculates each asset’s market value, identifies potential buyers and helps the distressed company sell its assets and repay its liabilities.
- Debt Terms Modification: The advisor helps the debtor change the debt terms, raise new debt, or get new equity to repay its existing creditors. Debt-for-equity swap and wiping out original shareholders are other possible options.
- Out-of-Court Settlement: This option helps a debtor postpone or avoid an official bankruptcy filing. Although it reduces disruption, the debtor loses flexibility and a chance for negotiation.
- Distressed Sale: If any of the above options fail to work, the debtor may pursue a sale process. The restructuring solutions for investment banks help attract prospective buyers by giving a steep discount. They also help debtors engage in finance activities opportunistically.
Raising Private Capital: A restructuring expert with sufficient experience in capital markets will market equity and private debt solutions to prospective buyers. They heavily structure and negotiate the debt to identify logical buyers and return expectations.
All in all, a restructuring group has less pitching than M&A and corporate finance. Although restructuring investment bankers create some pitches and marketing materials, marketing has less importance due to a limited number of restructuring bankers and franchises in the industry. That said, these bankers put together debtor and creditor side pitches for diverse situations and track the markets closely to identify signs of distress. Accordingly, restructuring solutions for investment banks facilitate negotiations with creditors and companies according to their financial goals and risk tolerance.
