Interview Question: Does a Distressed Company Always File for Bankruptcy?

In almost every restructuring investment banking interview you'll be tossed a question that is meant to suss out whether you actually know anything about how restructuring is done in practice.

That's because the majority of candidates who come into a restructuring interview simply don't understand what the day-to-day role will be at all.

The question I've chosen here - about the tie between restructuring investment banking and bankruptcy - is meant to quickly separate those who understand the role and those that don't.

This kind of question is so effective because many are under the erroneous belief that restructuring and bankruptcy are nearly synonymous. 

This is understandable given that there is such a dearth of information about what restructuring investment bankers actually do and that most of the academic textbooks out there focus exclusively on restructuring in the context of bankruptcy (primarily Chapter 11). 

At the outset, it's important to understand three things:

1. Chapter 7 (liquidation) is not relevant to RX bankers practically speaking. When Chapter 7 occurs a U.S. Trustee oversees the sale of all assets and a disbursement of proceeds occurs according to the rule of absolute priority. 
2. Chapter 11 processes - unless there's a pre-pack - are going to take a long time and involve lots of arguments that will quickly grow tedious. Being assigned to a Chapter 11 deal grows old quickly for analysts/associates, and is frustrating for MDs (remember: all those deal fees have to be approved by the court too!). 
3. Generally speaking, in my view the best deals for RX bankers to work on are out-of-court. These are usually quicker, much more interesting (because they're less formulaic), and in many respects easier for all parties.

If you're asked whether a distressed company always files for bankruptcy - or something to that effect - what the question is really asking is, "Do you understand what out-of-court restructuring is? Do you even understand that it's a thing?"

This is important to find out because the majority of the work any analyst or associate will be doing is on out-of-court restructurings, not on Chapter 11 deals. 

A good answer to this question would go something like the following:

Not necessarily. A distressed company can still have options before looking toward filing.

For example, if the reason why they're in distress is debt coming due, we could look at creative ways to amend and extend. Or if the debt burden if just too high, we could look at exchange offers that either reduce the aggregate about of debt outstanding or use PIK as opposed to cash interest. 

While there can be benefits to filing for Chapter 11 - primarily getting DIP financing and being able to put an automatic stay on creditors - any RX banker will look for plausible out-of-court restructurings to avoid filing if possible. 

This kind of answer would demonstrate a number of things.

1. It shows that you understand the importance of out-of-court work.
2. It shows you have an understanding of what kind of out-of-court work is done (e.g. amend and extend and exchange offers).
3. It shows that you understand why it can be appealing to file for Chapter 11, but ultimately why it's not always done (because there are plausible out-of-court solutions). 

The important takeaway here is that out-of-court restructuring is primarily what most RX bankers will be focused on. There are certainly some Chapter 11 cases that an analyst or associate will be put on during their tenure. However, at elite restructuring firms - places like PJT, Lazard, HL, EVR, Moelis, etc. - this will be less common (and less desirable, in my view) than doing out-of-court work. 

You could very well be put on a Chapter 11 deal when you begin your analyst stint and not have it resolved when you exit (don't worry, there will be many periods of time where you just don't work on the Chapter 11 deal; it's not a continual process where you'll be working constantly on it).

As always, if you want a more thorough introduction to restructuring along with lots of questions and answers that are a bit more fulsome, be sure to check out the Restructuring Interviews course. 

Best,

Alex