How do you determine if a debt restructuring plan is feasible?

The 13-week rolling cash-flow is of utmost importance and can make a real difference, whenever properly estimated. If industry expertise is needed in order to substantiate and/or validate the input, industry experts, with adequate hands-on experience should be involved as soon as possible.

Any restructuring plan success also depends upon the quality of debtors. There are multiple streams of cash outflow but there is only one main stream of cash inflow i.e. realisation from debtors. If the debtor realisation is on time and under control, the cashflows will be sound and debt restructuring will be successful. So for me following is the formula; Robust sales+adequate EBIDTA to take care of all obligations+timely realisation of debtors.

The Creditor should ensure that the Debtor provides reliable information for the cash flow projection (not too optimistic). Assumptions, which are used for the cash flow modeling, should be compared with the available data from peer analysis on both revenues and costs side. In my experience succesful restructuring projects have been based on the cash flow projections, which were adjusted by the Creditor using the market information, e.g. rental rates and OPEX/CAPEX per 1 sq.m. in commercial real estate, or EBITDA from 1 hectare in Agri sector, or ARPU in telecomunications, or mandatory OPEX/CAPEX per 1 kWt of electricity capacity in renewable energy sector (solar or wind power), etc.

I always start with a review of the loan documents, including any guaranties, the leases, the property any lockbox arrangement and all correspondence among the parties. I sit with the team to make sure we are aware of all facts. The analysis must also include the other items suggested in the article. If the borrower threatens lender liability or doesn't sit down to negotiate in good faith, I want to know the strength of my hand. I also want to get a pre-negotiation agreement signed to ensure that nothing is binding until everything is agreed to in writing. I start from the viewpoint that a deal with the borrower parties will serve both sides well in the long-run. I like to set the negotiations in such a manner as to best achieve that end.

Determining the feasibility of a debt restructuring plan involves a thorough financial analysis. First, assess the debtor's financial situation, including cash flows, assets, liabilities, and future projections. Then, evaluate the proposed terms of the restructuring, such as interest rate reductions, extended payment terms, or debt forgiveness. Compare these terms with the debtor's financial capacity to meet the new obligations. Also, consider external factors like market conditions and legal aspects. The plan is feasible if it improves the debtor's financial health without imposing undue risk on the creditor.

During financial restructuring, determining a company's maximum sustainable debt level is critical. This involves: - Meticulous analysis of capital structure (debt-to-equity, working capital) and cash flow generation (Free Cash Flow) to assess the ability to service debt obligations. - Industry benchmarks provide context for risk tolerance. - Realistic financial modeling & stress testing are crucial to determine the impact of varying debt loads. American Airlines (2011) is a good example for this holistic approach. After filing for bankruptcy, they underwent a restructuring. By analyzing projected FCF, they negotiated debt reduction & secured new financing, enabling them to emerge from bankruptcy with a sustainable debt level.

To determine whether a financial restructuring is feasible, you have to run the numbers. Model out the lien-holders' stakes, where they are today and where they'll be in holdings and equity when the restructuring is completed. You can massage the numbers, present them to the parties, and model out the financial statements to ensure the restructuring is feasible.

Tesla looked to secure additional debt financing to ramp up the production of its Model 3 cars. To evaluate its debt capacity, the company assessed its assets, which included its Gigafactories, intellectual property, and brand value. Tesla also evaluated its profitability and growth prospects, considering its expanding market share in the electric vehicle segment. Its Debt to Equity ratio was 0.98 in 2019, which was acceptable considering industry norms. Tesla successfully raised $2 billion in a bond offering in 2020. CXOs should consider incorporating macroeconomic factors like inflation rates and interest rate trends, financing options like hybrid securities into their debt capacity analyses.

In my opinion the debt capacity analysis should be strengthened by the analysis of (a) the existing and potential debt providers (including strategy of the existing creditors towards the debtor), (b) split of the debt structure between LT and ST debt (need and availability), (c) the possibility to minimize cost of the borrowing (either via substitution of the expensive creditor or shift from funded to unfunded exposure, etc.) and (d) acceess to the new ST financing, including necessary ST overdrafts. Within the lifecycle of the LT restructuring, there is high probability of economic downturns and unexpected events (like COVID) that could affect not only revenue generation ability of the borrower, but ability of the lender to finance.

In my experience this usually ends up with understanding what is the likely value of business after restructuring and 2-3 years of operations as exit for the creditor will likely include equity element, which may be the key driver for recovered funds. So it is not only about the EBITDA and cash flow we can expect, but also what valuation multiples we can expect at the exit.

It is essential to understand, that the Debtor is willing to cooperate with the Bank (creditors) in general and that the ultimate beneficiary owners (UBOs) of the Debtor are committed to the Company's business and ideally are ready to contribute to the restructuring by additional capital injection or at least prepared to provide personal guarantees/sureties. From my point of view, understanding of the position of the UBOs should be the first step of any restructuring and success of the restructuring depends on the cooperation from their side. In case of the restructuring of the debt of the Company that has a high regulatory risk (my experience - restructuring of the renewable energy sector), communication with the regulator is important.

For CXOs, it may be beneficial to engage a neutral mediator during the debt restructuring process, especially when stakeholder interests widely diverge. This mediator can facilitate negotiations and help reach a consensus more efficiently. According to the American Bankruptcy Institute, mediated restructuring negotiations have a 75% success rate. Additionally, using advanced analytics can help in quantitatively assessing stakeholder interests and the likely outcomes of different scenarios, thereby adding a layer of objectivity to the negotiations.

I believe this very much depends on the legal structure and security arrangements for debt and leveraging power for shareholders, suppliers and management. Creditors will always want to maximize recovery of funds as soon as possible, but they understand that this may not be possible without cooperation with management, key suppliers and key clients and are ready to negotiate options for continued business.

Consider legal and regulatory aspects of debt restructuring,as well as the willingness of the lender to offer alternative options ,as creditors are not required to offer restructuring options.

We usually call "debt restructuring" only consensual restructuring projects, as readiness of the debtor to cooperate is the predominant fundamental for succesul of such restructuring. Alternative options (legal actions, banckruptcy, foreclosure, or even sale/assignment of the debt directly to the new creditor or through Dutch auction) are from my point of view better to classify as "debt settlement" rather than "debt restructuring". In my practice the decision about the best option should be based on calculation of the potential cah flow and NPV per each possible option, which should definitely include factor of the probaility of the option (including based on the analysis of the possible legal actions and legal position of the debtor).

For CXOs, it might be useful to consider a "blended approach" that combines elements of both consensual and non-consensual restructuring. For instance, negotiating consensual terms with a majority of creditors can put pressure on remaining stakeholders to agree, thereby avoiding a non-consensual route. According to a study by the International Monetary Fund, countries using a blended approach had a 20% higher recovery rate compared to those using a single approach. Additionally, CXOs should also account for the reputational risks involved, especially in non-consensual options like bankruptcy, as they can have long-term implications on stakeholder relationships and market position.

Agree that every option should be evaluated in detail. However, it is highly recommended for the borrower to consider its own pros & cons while negotiating the plan with the creditor. Sometimes, in a zeal to restructure earliest, the borrower ends up in a long term problem.

The extent of distress coupled with the debtor's own investment strategies will often dictate whether a restructure can be best achieved consensually or via a formal insolvency process. Notwithstanding a willingness to restructure a loan note, the debtor must be sufficiently compensated for the underlying, and typically greater, risk associated with the restructure compared to that which was assessed upon loan origination. There are a range of tools to achieve this depending on the flexibility of the debtor including deferred income and equity. All things being equal, a debtor will seek to restructure where there is a financial outcome deemed sufficiently attractive taking into account risk, timeframe and cost of capital.

In case the business is forecasted to be a going concern in the future, there is also a need, alongside casflow analysis, dependant on market analysis and marketing plan, to assess the relevance of the strategy and leadership team.

CXOs should consider integrating advanced project management tools and methodologies like Agile or Scrum into the implementation plan for debt restructuring. These tools can help in the real-time tracking of milestones and offer greater flexibility in adjusting to unforeseen challenges. According to a report by the Project Management Institute, organizations using advanced project management methodologies are 28% more successful in achieving their goals. Additionally, incorporating Key Performance Indicators (KPIs) can provide quantifiable metrics to gauge the effectiveness of the restructuring process.

A key goal in plan implementation is to limit the impact of the balance sheet restructuring on the operating businesses. Competitors will seed fear of failure in the customer base, key employees may look to leave, productivity can suffer, key suppliers may change terms... uncertainty is not your friend. Whenever feasible, a deal should be reached quickly, struck out of court and announced and implemented in short order. Best practices and stakeholder sophistication (at least in the US) have evolved to the point where this can be done-- but one shouldn't expect it to be easy. And yes, professionals with specific process knowledge can be essential to making it happen.

The implementation plan covers also legal documentation, which needs to be concluded or amended within the restructuring. It is important to establish realistic timelines of the execution of the implementation plan taking into account analysis of the legal documentation, internal approval processes of the debtor and the involved creditors, local regulatory requirements and in general ability of the stakeholders to execute separate steps of the plan. For example, extension of the collateral documentation may require additional documents from State authorities, or additional engagement of the local external legal advisors, appointment of the independent financial advisor may depend on its capacity to generate timely progress reports, etc.

In my opinion, the most important thing is to ensure that the implementation plan is realistic. Restructuring is impossible if the business project is not viable. It's the same as putting gas in the tank of a broken car. Injecting money or reducing obligations is not enough if it is not ensured that the company is viable. Waste of time for creditors as for the debtor.

The review process allows to assess efficiency of the restructuring and among other thing should take into account (a) seasonality of the borrower's business, (b) proper set of covenants (both financial and non-financial) and conditions, (c) timeliness and content of the monitoring reports, prepared by the external advisor, (d) ability of the creditors to influence on strategic decision-making process of the borrower not only through the abovementioned covenants and conditions but also either via establishing of the approval process of the annual business plan / budget of the borrower or engagement of the independent member to the supervisory or management board of the debtor.

The most important at this stage is to monitor whether the business meets objectives set out in the restructuring plan and so maintains the exit scenarios for stakeholders. This is often the time when the quality of legal documentation signed during the implementation phase influences whether and how creditors and other stakeholders can influence management of the company if objectives are not met.

Assessing the feasibility of a debt restructuring plan is crucial for creditors today. I generally agree with the earlier points. I have to add that a well-designed plan should cover: Debtor, Group, Industry. Assets, Liabilities, Financial Analysis. Causes, Scope of Issues, Viable Solutions/Options. Affected Stakeholders, Creditor Classes. Unaffected Parties, Explanations. Role of Insolvency Administrator/Trustee, Practitioners. Restructuring Terms, Proposed Measures. Asset Sale, Product/Service Focus. Cost Reduction, New Agreements. Organizational Changes. Financial Model, Cash Flows. Debt Settlement, New Financing. Capital Structure, Guarantees. Viability Statement. Experience and consulting expertise enhance the assessment process.

Strategic value of the business and asset is also important to evaluate. This provides downside comfort in case of any eventuality, also helps structure the restructuring package and collaterals especially if shareholding level pledges are to be incorporated. This is important in cases where there is inherent strategic value in the assets despite challenges in immediate cash flows.

Besides the terms and operation of the restructure, an essential component is the management. Does the plan have the support of management? Does management clearly understand the terms, benefits, and compromises that it entails? Is the current management up to the task of coordinating implementation? Is the company's management established or is it in a proxy state? Does management embrace the restructure plan and incorporate it's terms into practice? The human component is crucial to success. Being alert to even the smallest signs of resistance is essential to addressing obstacles. Be prepared to negotiate extensively back and forth between parties to achieve a mutually acceptable restructure plan.

Too many of the restructuring plans still fail because of technical (inadequate expertise in the industry) and behavioral reasons. Restructuring consultants are selected on basis of lower fees and name. Rarely they know more about industry than the company, or about finance than the bank. So, they bring little to the table. Behaviorally they have zero skin in it except for fees. So, they play the role of mediators and the excel sheets represent that. The detail obfuscates and is rarely technically correct. It is desirable that any consultants or other participants in the process such as auditors, court mandated overseers get a significant part of payout from the success as measured by the performance of the restructuring over a time period.

The market in which the troubled company operates receives little attention. If you as a western bank have provided a loan to a western company in Russia (eg Heineken) and following western sanctions this business is simply just being forced out (sale for eur1), the outcome of any restructuring is a given. Any plan will fail due to higher powers than the company itself influences. The broader market perspective is insufficiently addressed.