Creditor Side Restructuring Investment Banking

As you likely already know, there are two distinct sides to restructuring investment banking: debtor side and creditor side.

Large restructuring investment banks - like PJT, Houlihan Lokey, Evercore, Lazard, etc. - will take on both debtor and creditor restructuring mandates.

Debtor side is what most interviewees are most familiar with. This kind of restructuring involves advising the company itself and is almost invariably a much more intensive job that involves significantly larger fees.

The restructuring investment bank on the debtor side will come up with potential restructuring alternatives either in-court or out-of-court. Then the debtor side investment bankers will try to wrangle other creditors to support this solution (with varying levels of consent needed depending on what the restructuring is).

This is a laborious process that is inherently iterative; you start out with a given idealized solution, go to the relevant creditors who will have their own proposals, and you'll eventually (hopefully!) end up at some equitable solution everyone can agree to.

For many candidates looking to break into restructuring investment banking they generally understand what debtor side engagements are all about. However, on the creditor side things get a bit more iffy.

This is partly why I created the course Restructuring Interviews to shed light on exactly restructuring investment banking is and how to ace your interview. 

With all that said, let's get into how creditor side restructuring works.

What is Creditor Side Restructuring

As the name implies, creditor side restructuring operates on the other side of the table to the debtor.

As mentioned above, debtor side restructuring investment bankers will come up with an idealized proposal that they think can right-size the company and be agreeable to those creditors that they need the consent of in order to do this.

For example, this can be as simple as needing to get the consent of Senior Notes in order to place a new piece of debt above them (so that Senior Notes will be primed).

It can also take a more complicated form where the "money terms" of a piece of the capital structure are changing, or the debtor is trying to get a certain part of the capital structure to exchange their securities at a haircut for other, new securities. 

The permutations of restructurings can get complicated quite quickly. However, the point is that when a debtor side investment banking team comes up with a solution they then need to go to the creditors. 

Creditors then need to carefully study the proposal and either agree to it, reject it, or counter with what they think would be better. With a few caveats, all creditors in a given class need to be treated equitably (the same) and this creates the first major headache of restructuring: getting diverse loan or bond holders to agree in sufficient numbers to doing a restructuring. 

The reason why this is a headache is that different creditors will have different incentive structures; you'll have institutional holders of loans or bonds who are eager to try to do a restructuring, and don't want to be bothered with too much fighting, and then activist distressed debt hedge funds who bought the securities purely because they were anticipating and wanting a fight to extract more value from the debtor. 

What Restructuring Investment Banks Will Advise Creditors

The first thing to note is that almost all the major restructuring investment banks will take on creditor side mandates. 

For some reason, this seems to not be overly well understood by many interviewees who seem to think that only Houlihan Lokey handles creditor side mandates. 

While it's certainly true that HL handles lots of creditor side mandates all other major restructuring investment banks will take them on as well.

Generally investment banks - as you'd expect! - want to earn as much fees as possible. This will result in them wanting to get debtor side mandates when they can because there's more work and thus more fees.

However, generally when a bank fails to win the debtor side mandate they'll shuffle themselves over to the creditor side and try to win a mandate with a group of creditors there.

This then raises the next question of who exactly on the creditor side is hiring a restructuring investment bank?

What Kind of Creditors Are Advised

This is a surprisingly common interview question because a large number of folks interested in restructuring don't quite understand who we're dealing with on the creditor side.

Is it all the creditors? Is it all the members or a certain class? Is is just one firm that owns a lot of certain bonds or loans?

Let's look at an example coming out of PJT Partners.

The first is from the Bristow Group. PJT was an advisor to, "...certain holders of the Secured Notes".

The Restructuring Support Agreement (RSA) involved just under 90% of the Secured Notes agreeing to a new capital structure that involves their economic interests in the company changing (you can read the above link for the full details).

In this scenario, PJT went and was engaged by certain holders of the Secured Notes. This would not have been all of them, but rather a large enough chunk such that if they did not go along with a debtor side proposal it would have made it difficult or impossible to get through (leaving aside a lot of nuance in how restructurings can occur). 

These creditors looked to PJT to give them advice as to whether or not the first proposal from the debtor was good, what terms should be changed within it, how many other affected creditors would likely go along with it, etc. 

In other words, just like on the debtor side PJT acted as a middle man: collecting all the information, consolidating it, analyzing it, presenting it to creditors, and then making recommendations on how the creditors should proceed.

Generally, creditor side mandates involve a large chunk of an affected class - which could be lots of loans or bonds owned by one firm or by a group of firms - and then helping them get the most possible value out of the debtor in a restructuring transaction (either in-court or out-of-court).

It's important to remember:

• Creditor side mandates involve classes that will be affected (impaired in some manner) in any restructuring that the debtor proposes
• Creditor side mandates will not likely involve all creditors in a class, but rather some reasonably large percent such that they hold quite a lot of influence over any restructuring that ends up going through
• The creditors advised could be a single firm that owns a big chunk of loans or bonds, or it could be a group of firms who band together promising to act as one cohort (and will be advised in unison by the restructuring investment bank)

Why Would a Distressed Hedge Fund Hire a Restructuring Investment Bank?

This is a common thought many have. If lots of restructuring investment banking analysts move to distressed hedge funds, shouldn't they not need to shell out lots of fees to an investment bank for advice? Shouldn't they be able to handle things internally?

This is a great line of thinking and the answer is that some distressed hedge funds will, of course, go it alone.

However, often a restructuring investment bank will be brought in and advise a distressed hedge fund when they are part of a larger consortium that will often include less sophisticated investors (like pension funds or endowments, etc.). Some less sophisticated investors may be wary of just letting a fund lead the negotiations and worry about if their best interests are really being represented.

For example, in J.Crew's latest restructuring you have Anchorange (a big, very sophisticated distressed hedge fund) acting as a large part of an ad hoc committee. Ad hoc committees are unofficial committees that band together and almost invariably vote as a block so that they have outsized influence.

In this case - in particular because we're dealing with a Chapter 11 - it makes perfect sense for PJT to be brought in to advise this committee because it will involve a diverse set of folks and lots of negotiations with J.Crew's debtor side bankers (which, if nothing else, would take a lot of time to engage in directly). 

What is the Work of a Creditor Side Restructuring Investment Banker?

The work of a creditor side restructuring investment banker - as already mentioned - is generally quite a bit less onerous than the debtor side of the equation. 

On the debtor side you are being proactive, while on the creditor side you are being more reactive. 

On the creditor side - especially when you're dealing with a diverse ad hoc committee like in the J.Crew deal - you will be spending a lot of time communicating to these diverse players where the debtor side is at, what potential next steps are, and what you advise them to do moving forward.

A lot of the banking work will be updating models of the company in light of various restructuring proposals coming out of the debtor side and then seeing how these proposals would work if you could get some more concessions out of the debtor side. 

When deals are getting close to the finish line then there is a lot of back and forth - from the creditor side bankers to the creditors they're advising - on how they think this agreement will go down with the rest of the creditors (the votes of whom may be needed, but who are not being advised by the bankers themselves).

The work of a creditor side mandate technically speaking isn't much different, it's just generally less intensive. The largest difference is having to communicate to a larger audience - not just the singular debtor like in a debtor side engagement - and having to be reactive to the proposals coming out of the debtor side (although there will sometimes be novel proposals coming from the creditor side for the debtor to consider). 

Conclusion

Creditor side engagements are one of the less understood parts of restructuring investment banking. This is largely due to the confusion that exists over who exactly is being advised, what the nature of the work is, and how deals ultimately come together.

Important things to keep in mind are that you are advising a selection of relevant creditors, you are acting as a communicator-in-chief to these creditors who may have different levels of sophistication, and that you're normally being reactive to the proposals coming out of the debtor side of the equation. 

If you're gearing up for RX interviews and would like to further understand how restructuring investment banking works and get access to over 500 restructuring interview questions, be sure to check out the Restructuring Interviews course.