Top 4 Greenhill Restructuring Interview Questions

While league tables in M&A tend to be relatively static - with firms taking years to rise or fall just a few positions - the smaller playing field of restructuring lends itself toward the firms "at the top" constantly moving around.

The primary impetus for a restructuring practice falling or rising in the league tables is, as you'd guess, managing directors coming and going. 

Over the past several years Greenhill has focused significant time and effort to build out its restructuring practice. Notably, in 2018 Greenhill landed Neil Augustine and made him co-head of RX for North America (after a long stint at Rothschild). 

As was quite predictable, Greenhill's deal flow has ballooned over the past few years and Greenhill has been rapidly growing its analyst and associate class to try to handle it all. 

The following are some restructuring interview questions you could expect to pop up at Greenhill. From those I've talked to, they tend to be quite technical and they love asking waterfall and residual equity value questions. If you're looking for even more RX questions, be sure to check out Restructuring Interviews

Question 1: Let's say we have a company that has a first lien term loan (1L TL) of $100 and a second lien term loan of $100. The company has an enterprise value (EV) of $150. Where would you think each tranche of debt trades?

This is a pretty standard waterfall question that will often have slightly more difficult questions that spring off of it. 

So we have an EV of $150. That obviously makes whole the 1L, so you would expect the 1L to trade at roughly around par. There is then $50 in "value" leftover for the 2L, which would provide for a 50% recovery.

Therefore, you'd expect the 2L to trade at roughly around fifty cents on the dollar.

That's a fine answer to give. However, if you want to get a little more nuanced we can elaborate a bit here. There is always a bit of optionality embedded in any piece of the capital structure that is impaired and one wouldn't be surprised to see the 2L trade a bit over what it's pure "recovery value" should dictate (meaning, trade over fifty cents on the dollar). 

By this I mean, what if this company suddenly turns the corner - just as it was likely having to enter into Chapter 11 - and is able to raise some junior debt or new equity out of court? If this occurred, you'd expect the 1L to not change much in price - since it was probably trading around par - but you'd expect the 2L to trade up significantly in light of the lesser probability of having to file.

So if a distressed investor thinks the recovery value is definitely fifty cents on the dollar then they may actually like buying the 2L at fifty cents on the dollar even if there's just a 10% probability that the company turns things around (because then the 2L may rise to be seventy-five or eighty-five or whatever). 

At the same time, it's important to note that how debt trades when it is heavily distressed (as this 2L most certainly would be!) isn't quite "efficient". There may be some institutional investors who are just trying to sell out of this 2L because they don't have the mandate, risk appetite, or expertise to carry it through a filing so they are almost forced sellers. This can create a kind of gap where the true value of the 2L isn't showing up in the price, because not everyone has the same capacity or desire to hold this kind of debt moving forward.

Question 2: For the aforementioned company, where would we expect equity value to trade at?

Naively, one would assume zero, of course, since the "value" of the company breaks at the 2L (and it's not like we're predicting the 2L will get a 95% recovery or anything close to being made whole). 

However, the reality is that a distressed company of this kind does have equity value because of its inherent optionality. While equity is the lowest part of the capital structure, it has (theoretically) unlimited upside should the company turn things around before filing. It also has, by definition, a set floor or downside of zero (meaning the equity is worthless). 

Obviously, what we're getting at by talking about optionality and the potential asymmetric profit profile of equity is that equity - for a highly distressed company - beings to trade like a call option.

Should the company manage to somehow turn things around and avoid having to file - by pulling a Tupperware or more recently an AMC - then one would expect debt to trade up and equity to trade up even further (the gains on Tupperware equity, for example, are over 15x from their lows at present).

If your asked how specifically one could value the equity, you can say via the Black-Scholes model as equity, in the case, is really just a call option on the company.

Question 3: Let's say we have two distressed companies that have the exact same EV and debt (where debt is significantly greater than EV). However, let's say say that Company A has a $1M market cap and Company B has a $5M market cap. Which company has more volatility?

This is a clever question that I can't imagine most get right, but let's go over it! The key to this question is just knowing that the more volatility that exists, the higher the value of an option is.

Therefore, if a distressed company's equity trades like a call option, the company with the larger market cap - all else being equal - will per se be more volatile. In other words, high volatility increases option prices and since distressed equity trades like a call option a company with a higher market cap must - again, all else being equal - have higher volatility.

The intuition here behind how volatility increases option prices is that the more volatile an underlying is, the greater the chance is that it will be in the money at some point. This is why high vol translates to both higher put and call prices.

Question 4: Let's say we have $50 in cash interest and $50 in PIK interest. Can you walk me through the three statements for this?

Often instead of being asked to simply walk through how cash interest or PIK interest flows through the three statements, you'll be asked to do both at the same time.

There's no trick or anything to do differently here. You can just walk through each process separately while making sure not to lose track. In case you aren't sure on how PIK interest is handled, I already wrote up a question on that here. The cash interest side is obviously very straightforward.

As always, best of luck in your prep! Greenhill is a fast growing firm on the RX side and a great place to join as a junior. Their RX questions they ask do tend to be some of the more difficult, so make sure you're well prepared.

You should also, as always, have a deal or two prepared to talk about. I wouldn't worry too much about it needing to be a Greenhill deal specifically -- although it's great if you cover one. A great RX deal in general - regardless of the firm you're interviewing with - to talk about this cycle is Serta Simmons as it was well publicized and reasonably controversial.

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