Distressed Debt and Restructuring: Investment Banking's Role in Fundraising and Exits

Distressed Debt and Restructuring: Investment Banking's Role in Fundraising and Exits

Introduction

In the past few years, the global economy has faced tremendous disruption, resulting in an increase in distressed debt and restructuring activity. This is where investment banks come in, delivering much-needed assistance (and advice) for fundraising and exits. The following article will dive into the realm of distressed debt and restructuring, and analyze the important role investment banks serve in these processes.

Learn on distressed debt and restructuring

Distressed debt: debt from companies in distress, defaulting on loan payments or bankruptcy.

Term	Definition	Key Characteristics
Distressed Debt	Debt obligations at risk of default or already defaulted	High risk, potential for high returns, often traded at discounted prices
Restructuring	Modifying debt terms to make payments more manageable	Can involve extending payment periods, reducing interest rates, or forgiving part of the debt
Types of Restructuring		Debt forgiveness, debt-for-equity swaps, extension of payment periods, reduction of interest rates
Benefits of Restructuring		Can help borrowers avoid bankruptcy, preserve business operations, and recover value for creditors
Challenges of Restructuring		Can be complex and time-consuming, may require coordination among multiple stakeholders, and can involve significant costs

Restructuring, however, refers to the reorganization of a business's debt, operations, or ownership structure in order to restore financial health.

Causes of Distressed Debt

There may be several reasons which company might come at the distressed situation such as:

Over-leveraged: Highly aggressive in loans which is unsustainable

Market downturns: Economic recessions or sector-specific obstacles can affect earnings and profitability.

Operational obstacles: Bad management, ineffective operations, or insufficient cost control can cause financial distress.

Data: October 2023'

Investment banks are instrumental in guiding issuers through distressed debt and restructuring situations. Their expertise includes:

Debt Advisory

Advising on restructuring, including negotiation with lenders, creditors and other stakeholders.

Fundraising

Helping companies raise capital to refinance their debt, finance their ongoing operations or support turnaround plans.

M&A Advisory

Providing advice on mergers, acquisitions, and divestitures to assist companies in reorganizing their operations, paying down debt, or abandoning non-core businesses

Restructuring Advisory

Advising on strategic alternatives for restructuring, which may include bankruptcy, liquidation or out-of-court restructuring.

How Distressed Companies Raise Funds

Debt restructuring is one of the ways investment banks can assist distressed companies access capital. These include:

Debt-for-Equity Swaps

Converting debt to equity in order to relieve debt burdens and inject equity into the company.

Asset-Based Lending

Secured against certain marketable assets (property, equipment, inventory).

Distressed Debt Exchanges

Replacing existing debt with new debt with better terms, like lower interest rates or extended maturities.

Equity Issuances is the creation of new shares and wants to raise capital to reduce debt and inject part of capital.

The Specialist: Exit Strategies for Distressed Companies

Investment banks also counsel troubled companies on exit strategies such as:

Sale of Non-Core Assets

Keeping only what is absolutely necessary for the continued operations of the organization.

Merger or Acquisition

Merging with another company to cut costs, become more efficient, and better compete.

Initial Public Offering (IPO)

Access to Public Exchanges: Listing on a public exchange to raise capital, increase liquidity, and provide an exit for existing shareholders.

Pre-Packaged Bankruptcy

Bankruptcy filing with a prepackaged plan to reorganize debt, cut expenses, and come out a more viable business.

Examples: Examples of Successful Restructurings

With the assistance of investment banks, several high-profile companies did a successful restructuring of their debt and operations. These include:

General Motors

GM's bankruptcy in 2009 involved debt-for-equity swaps and asset cannibalization.

American Airlines

American Airlines declared bankruptcy in 2013, and then merged with US Airways to form one of the largest airlines in the world.

Toys "R" Us

Toys "R" Us went bankrupt in 2017, and undertook restructuring efforts to close unprofitable stores and sell non-core assets.

Conclusion

Distressed debt and restructuring are highly complex and expert-driven processes. Investment banks can help companies navigate these situations, providing advice on fundraising and exit strategies. Companies with a clear understanding of all the options under consideration can chart out their future accordingly and work towards a successful restructuring.

References

“Distressed Debt and Restructuring,” by Bloomberg Law.

“Investment Banking and Restructuring” Euromoney

"A Guide to Distressed Debt and Restructuring" by PwC.

Restructuring and Insolvency report by Deloitte

Category:👇