Interview Question: Tell Me About a Recent Deal
In restructuring interviews you'll sometimes be asked to talk about a recent deal that has occurred. This is a thornier question than you may think, because restructuring deals can be quite complex and the information available to you can be rather lacking (at least compared to M&A deals).
For this reason, there are a few general guidelines I tell folks about picking a recent deal to talk about.
Don't Choose a Chapter 11
Chapter 11's are not only complicated, they have an extensive and publicly available record of what has been done (if you have access to PACER).
So if you're talking about a Chapter 11 case you should have an operating understanding of the plan of reorganization (POR), what the 13 week cash flows were, what was discharged in bankruptcy, who owned what parts of the capital structure, what they fought over, and what ultimately happened in the end (what's the exit facility and ultimate recovery values and forms of consideration for creditors).
The point is that whoever is interviewing you - if they're familiar with the case - can really go down a rabbit hole of things that you could be aware of, but likely aren't. That's a bad recipe.
Why You Should Talk About Out-of-Court Deals
Instead of talking about Chapter 11's, I recommend talking about recent out-of-court deals for private companies owned by PE funds.
Of course, as we talk about in Restructuring Interviews, a lot of restructuring work occurs with companies that have been snatched up by PE firms (because of the debt load inherent to doing a LBO).
There are two primary reasons why I always recommend talking about these kinds of out-of-court deals:
- There won't be much publicly available information out there, so you won't be asked to delve into the exact details (as you could not be aware of them)
- It shows you understand that the work of a restructuring investment bank extends far beyond just Chapter 11 work, but includes out-of-court work (this is an area of RX that many interviewees are less familiar with than traditional Chapter 11s)
Finding deals that fit this mold is actually quite easy. All you need to do is Google something like "restructuring Bloomberg retail" or "restructuring deal notes WSJ" and you'll find loads of recent articles on restructuring deals that have occurred.
What you want to find are articles on a company's restructuring that give you:
- Details of what the out-of-court restructuring was (an exchange, amend and extend, up-tier, etc.)
- Details of roughly what the current capital structure of the company is and how it has changed (e.g. a pro forma cap table of some kind)
- Details of roughly what the current market environment is that has led the company to pursue a restructuring
Most articles for high profile companies that have just restructured out-of-court will include most of these details.
Then your job is simply to memorize the details and pack it all into a two to four minute answer for your interview.
You should always preface your answer by making it clear that this is a "private-private" deal (private company owned by a private equity firm). That way your interviewer knows that you likely won't know exactly what their capital structure is or the terms of everything in the capital structure (because you don't have access to tools like MarkIt or Bloomberg that can give you a bit of insight via secondary market trading).
A recent example you may want to dig into is Guitar Center.
Update, January 2021: Guitar Center's out-of-court restructuring didn't go overly well, because in November they filed for Chapter 11! It was a pre-pack and actually quite straightforward (it exited Chapter 11 in just over a month with a heavily reduced debt load and fresh cash injected from the sponsors in exchange for all the reorganized equity of the company).
Guitar Center was one of the companies I had to do a profile on when I was working at an EB in RX. So they've been on the "restructuring radar" for quite awhile.
In fact, they've done a number of restructurings over the past few years to try to right-size their capital structure.
Last month, as you can see from the article linked above, they purposefully missed a few bond payments. Due to the virus, their liquidity went from $124m in the end of March, 2020 to now just $30m.
Remember: Liquidity in RX includes the amount of their revolver they can draw so it's not just the cash they have in the bank.
I'll link some articles below so you can do some deeper research if you'd like, but here's roughly what happened:
- Guitar Center was worried about their liquidity if they made the aforementioned interest payments, so they just didn't
- Guitar Center currently has about $1.2b in debt outstanding (which is actually quite a bit less than they had five years ago)
- Guitar Center went and raised $32.5m in super-priority senior secured notes (10% coupon due 2022) from the existing senior secured note holders
- Guitar Center used those proceeds almost entirely to make the missed payment on the senior secured notes (due 2021) that was missed in April, 2020
- At the same time it exchanged $7m of senior unsecured notes for about $5m of the aforementioned senior secured notes (not the new super-priority ones)
Why would anyone consent or participate here?
Well it's likely the case that everyone in the capital structure recognizes that now is a bad time to push Guitar Center into filing. Instead what this deal does is pay the missed interest payments, get senior secured note holders the capacity to move even higher in the capital structure (where recovery will be higher with a great coupon as well), and for the unsecured note holders who participated they were also able to move up the capital structure as well (with a lower claim amount) via exchanging.
In short: Everyone in the capital structure recognized their recovery was going to be quite low in the event of filing. Doing this deal allowed them to all get a bit higher in the capital structure (where their losses will be less as a percent) while buying the company time.
Perhaps holders across the capital structure are also thinking about optionality. Guitar Center didn't have terrible liquidity only a few moths ago. Maybe they can get some FCF going by the end of the year and be in a better position to deal with the maturity walls coming due.
In reality, Guitar Center represents a kind of niche kind of restructuring. This deal doesn't solve anything. It just prevents holders from having to force them into a Chapter 11 that perhaps they feel Guitar Center is not in a good position to undergo right now (a pandemic is probably not a great time, since their 13 week cash flow statements will be horrendous).
The writing has been on the proverbial wall for Guitar Center for years now. This is more an interesting positioning move where RX bankers aligned everyone's incentives to punt a decision about bigger steps down the road a little while (and it will be just a little while).
Update, January 2021: As you can see, what I wrote back in May for why this out-of-court restructuring occurred seems to have been the case. It wasn't about solving anything, it was about buying some time so a more fulsome in-court solution could be done under better timing (like when you aren't in the midst of a credit market upheaval). It also afforded Guitar Center a bit of time to maybe turn things around and avoid having to file altogether, like Tupperware was able to do, although that was always a long shot.
So there you have it. Of course, you should pick your own example of a deal that is current.
However, I would recommend talking about a retailer that is private-private (private company owned by a PE fund) as that will be talked about in the press sufficiently to give you the details you need, while giving you cover since it's not something where you'll have to go sleuthing through public records to know all the nitty-gritty details.