Restructuring Investment Banking: Everything You Need to KnowUpdated:
Restructuring investment banking is both one of the most niche and misunderstood areas of investment banking. This is largely because there is incredibly limited information on what restructuring investment banking actually entails and even less information produced by those who have worked within top restructuring groups.
However, over the past five years there has been a rapid increase in those who have become interested in restructuring.
In particular, restructuring has rapidly become the area of investment banking most sought after by students coming out of top colleges at either the undergraduate or graduate level.
This rapid rise in the popularity of restructuring can be attributed to a few different factors:
- The limited number of analyst and associate positions at the top restructuring groups (the most recent league table for restructuring is provided below -- although league tables aren't perfect, as we'll get into).
- The generally higher level of pay restructuring investment bankers earn (this largely just being a function of restructuring occurring at EBs not BBs).
- The novelty of restructuring deals and the inherent mix of psychology, law, and finance that goes into putting together a deal -- while perhaps slightly overstated, it's not entirely overstated to say each deal in restructuring is relatively unique.
- The wide swath of potential exit opportunities that will be available (going to a distressed debt hedge fund, a traditional private equity fund, a private credit fund, etc.).
This rise in popularity has only been exacerbated by the events of 2020 which led to many restructuring investment banks having to turn down pitches and mandates.
In this lengthy post we'll go over the basics of restructuring investment banking including covering who the major players are, what the solutions they recommend will look like, and what makes the world of restructuring so unique.
Whether you're looking to break into restructuring investment banking or are just looking to better understand the world of restructuring, you may want to take a look at all the Restructuring Interviews guides I've put together.
Included is an overview guide stretching over 100-pages that details how deals are put together, what deliverables look like, and what the day-to-day job entails. Separately there are over 500 interview questions and answers included that range from the most basic to the most advanced.
Note: This post was initially published in late-2020. And even though it is a (very) long post, it should be treated as a gentle introduction with a lot of nuance glazed over. When it comes to restructuring, the devil is in the details. But hopefully this post helps give you a lay of the land before you dive deeper.
Restructuring Investment Banking
In order to break down the world of restructuring as succinctly as possible, this post will be broken down into the following sections. Feel free to skip around to whatever area you're most curious about or read this from start to finish.
- What is Restructuring Investment Banking?
- The Restructuring Timeline
- The Signs of Corporate Distress
- Restructuring Investment Banks and What They Do
- The Restructuring Solutions
- Restructuring Deal Trends
- Restructuring Investment Banking Roles
- What Makes Restructuring Investment Banking Unique
- Additional Restructuring Resources
For many laypeople - including those with years of experience in finance outside of restructuring - there is a misconception that restructuring investment banking deals with companies that are irredeemably broken.
In reality restructuring investment banking deals exclusively with companies that can not only be salvaged, but can potentially thrive moving forward if they rightsize their capital structure.
The goal of a restructuring is to find a solution - that is agreeable to both the relevant creditors (debt holders) and the debtor (the company) - as to how the company should reorganize itself.
However, there is no getting around the fact that in any restructuring some creditors are going to need to take a hair cut on the debt they hold or take other forms of consideration. The question isn't if, but rather how much and when.
Restructuring investment bankers will be hired by the debtor (the company) and a different set of restructuring investment bankers will often, but not invariably, be hired by a group of creditors (not all of them as a whole) to advise them as well.
While any restructuring scenario is necessarily adversarial the shared aim of both parties is for the company to be set up for success moving forward as a result of the restructuring.
Restructuring investment banking boils down to the debtor-side bankers developing innovative, bespoke solutions to craft a new capital structure that will allow a company to either have time to turn things around, or become otherwise vialable under this new capital structure.
The creditor-side bankers then will engage in negotiations trying to get the best terms (e.g., meaning maximize the return) for their side.
Restructuring is an incredibly iterative process that requires lots of back and forth, development of new term sheets, long conference calls, and (for the restructuring analysts or associates) seemingly endless rejiggering of decks and models.
Note: Unlike traditional M&A banking - dominated by household names like Goldman Sachs, J.P. Morgan, and Morgan Stanley - most restructuring activity is done by a select group of relatively small, elite firms such as PJT, Houlihan Lokey, and Evercore.
Before moving forward, we should take a step back to discuss the general timeline that undergirds restructuring transactions.
Because another common misconception is that restructuring investment bankers get involved at the point of the bankruptcy filing. While this could conceivably be true, generally speaking senior restructuring investment bankers will have a long list of companies that they keep their eyes on.
And when one of these companies appears to be getting firmly into distressed territory the banker will begin making calls, put together a pitch, and try to get in front of the company to illustrate how they can rightsize their balance sheet.
So, the job of a (senior) restructuring investment banker is to get in front of the company as early as possible in order to take control of the process and come up with innovative solutions (in an ideal world, out-of-court) while there is still time.
For example, when I first started in restructuring in 2017 one of my lowly tasks was to compile a cap table for Hertz (no easy task, as it was an absolute mess). At the time Hertz looked like it only had a modest amount of stress and probably wouldn't need to restructure anytime soon. Fast forward to 2020 and Hertz rather infamously filed Chapter 11 (being advised by Moelis).
Note: In a wild turn of events, Hertz became a meme stock after filing much to the absolute bewilderment of everyone in restructuring. But, in the end, Hertz became one of the extremely rare cases where equity did receive a recovery, and the case also revived controversy surrounding the solvent debtor exception.
Anyway, the point is that restructuring investment bankers try to get in front of a company long before they themselves even begin to think seriously that they are going to have to meaningfully restructure.
For this reason, before talking about restructuring solutions we should first talk about what signs of distress a restructuring investment banker will look for.
Because understanding what the telltale signs of distress are will allow us to get a better feel for why restructuring investment bankers are going to pitch certain solutions to rightsize the company -- and toss aside other potential solutions.
As mentioned previously, senior rx bankers will have a list of companies they are keeping their eyes on that are not necessarily in distress now, but are apt to become distressed in the future.
This "list" is represented by screens and profiles...
Screens are a compilation of one-pagers on companies - usually all within the same industry, such as industrials, healthcare, etc. - that include a detailed cap table and a few important points (usually contained in the footnotes of the page).
Screens are for companies that are reasonably healthy (or at least not overly distressed) now, but could end up being distressed in the years to come. In other words, screens are just the way in which restructuring investment bankers keep an eye on troubled companies in a certain section.
These screens are routinely updated - every quarter or two - to reflect where the companies are now. If a managing director or partner spots a company trending in the wrong direction they'll then ask an analyst or an associate to create a profile on the company.
Profiles are generally 1-3 pages in length and get into a bit more detail. They'll often contain a chart of where various pieces of the capital structure are trading, a little liquidity table, a qualitative page on the company with recent news, and then a cap table with a few more footnotes added than before (on relevant covenants, basket capacity, etc.).
So when talking about a company in distress, what one should really be keeping an eye on are the critical elements that are included in profiles and screens.
Note: Again, this is a very quick-and-dirty overview to avoid this being a 20,000 word post. In the main Restructuring Interviews guide we get into this much more and provide examples of what actual screens and profiles look like.
Limited or Diminishing Liquidity
In restructuring we have a very specific definition of liquidity that is as follows:
- + Revolver Capacity (subject to restrictions on draws)
- - Letters of Credit Outstanding
- - Restricted Cash (cash that is earmarked for something)
When dealing with a company that is approaching or in distress, having an idea of their real liquidity position (e.g., the cash available to do something with) is imperative.
This is because liquidity is indicative of a company's runway (which is why restructuring investment bankers will often create something called "liquidity roll forwards" to project out liquidity). Additionally, liquidity is indicative of a company's optionality (e.g., if a company has a reasonable amount of liquidity then a wider assortment of creative transactions may be open to them than if they had virtually no available cash).
Maturity Walls Approaching
Maturity walls, as the name implies, are the dates at which the debt of a company will mature. For a healthy company, even if most of the debt matures in the same year, it's not an overly large concern because the company can roll over (refinance) that debt easily.
However, for companies that are approaching or are in distress things get a little bit more complicated because perhaps not all the debt can be rolled over. This inability to ultimately pay back the debt is often an impetus for needing to do a wholesale restructuring of the company so is something a restructuring investment bankers keeps their eye on.
An example of how maturity walls can be illustrated is to show what debt is coming due and when (obviously, in a profile or pitch, you'll do nice little graphs in Excel not just grab a Bloomberg screenshot!).
Note: Party City ended up filing in early 2023 with Moelis getting the debtor-side mandate.
Debt Trading Level Declines
Another common misconception is that equity trading levels matter a great deal to a restructuring investment banker.
Of course, if a publicly traded stock is trading so poorly that it's about to be delisted then that's certainly an indication something has gone wrong. However, a rx banker is first and foremost concerned with the capital structure (which is exclusive of equity).
What these bankers care about most, to ascertain whether their services may needed by the company moving forward, is debt trading down significantly. In particular, one thing restructuring investment bankers will keep their eye on is the debt trading level of various tranches of debt within the same company, as often there can be quite a bifurcation, and who the largest owners are.
For example, if a Term Loan A (the highest term loan in the capital structure) is trading consistently around 90, but the Senior Notes (subordinated to the TLA) are trading at 80 one month and 70 the next then that's a sign that investors think the company is in trouble and that the recovery values of the Senior Notes will be quite poor in the event of a Chapter 11.
Note: The point here is that even those the Senior Notes are trading down, it may be the case that the TLA stays relatively stable because market participants view the TLA as very likely to get full recovery if filing were to occur. In other words, the top of the cap stack not moving too much isn't per se indicative of there being no distress -- not all pieces of the cap structure are going to move in equal step!
Here's a recent example of the massive volatility in debt trading levels that can occur when restructuring rumors are swirling and transactions are being contemplated:
Now that we've quickly covered when restructuring investment bankers begin looking at companies, and what they look for, it's worth taking a bit of time to talk about where these bankers actually work.
While Bulge Bracket firms will often have a restructuring practice, these are rather muted in what they can or will do for a variety of reasons (primarily around conflicts of interests they have with the companies that are now distressed).
So, the primary restructuring groups are contained within small shops with limited or no balance sheet (meaning no traditional ECM or DCM desks).
While arguments can be had about who the top restructuring investment banking groups are, the following are what I would describe as the Tier 1 restructuring groups who are consistently getting great mandates...
However, because there are relatively few mandates to go around, in any given year you can have a shop rise significantly up the league tables (especially if you're compiling the league tables by fees approved in-court).
Plus, if a group is rapidly expanding by poaching talent from other shops, they can quickly end up rising through the league tables -- or, conversely, falling down them.
Anyway, the latest 2022 restructuring league table from Reorg - covering only in-court activity, as that's what can be most reliably aggregated - shows HL, PJT, and Evercore leading the way when it comes to the overall number of mandates...
And here's Reorg's full listing from their 2022 in-court league table...
An important note about restructuring league tables is that, unlike M&A league tables, they can be somewhat misleading since many deals are done out-of-court and are thus traditionally unaccounted for.
Further, listed above are just the number of engagements -- but engagements are not all created equal. For example, you can have a debtor-side mandate but it can involve a small sponsor-backed company doing a pre-pack where the fees will be significantly less. Alternatively, you can have a bunch of creditor-side mandates, making your overall number of mandates look good, but each may involve just advising small ad hoc groups that comes along with muted fees.
If one were to put together a proper league table, one would look at the fees that each shop brought in on both their out-of-court and in-court mandates and tally them up. But there's far too much opacity when it comes to fees related to out-of-court work to ever really create a definitive league table like this.
So, despite the propensity of everyone to want to look at league tables, this is why league tables aren't taken overly seriously in restructuring. At best they give you a directional sense of things (e.g., it's not a surprise to see HL, PJT, and EVR with the most mandates!) but you can't read too deeply into them.
Anyway, as already discussed, senior members of a restructuring investment banking group will be keeping an eye on companies that are trending toward distress.
And when they notice that a company should start thinking about restructuring solutions they will reach out in order to try to pitch the company on a certain restructuring solution (or, more accurately, they'll often present a series of potential solutions that'll vary in how comprehensive they are).
If a company decides that restructuring is something they should proactively pursue, they'll often bring in other restructuring groups to pitch them as well. This is a bit less coherent of a process than a bake-off in M&A, but the same principle applies.
For larger companies you'll often have around three to five restructuring investment bankers come in and pitch what they think the company should do and (more importantly) what the company can realistically do.
Unlike in M&A where you'll have a number of different investment banks working together on a transaction, in restructuring the debtor will often just have a sole advisor (for example, PJT).
With that being said, the long nights of putting together a pitch for the company are not necessarily wasted if the pitch wasn't won. Instead, the restructuring investment banks that lost the debtor-side mandate will then just go to the relevant creditors, in due time, and try to win a mandate advising them.
Note: There won't always be creditor-side mandates though. Creditors bringing on rx advisors tends to just occur in large restructurings where relevant creditors band together because they all have large amounts of capital invested and want independent advice on how to maximize their recovery.
A quick way to summarize debtor-side vs. creditor-side restructuring is that debtor-side restructuring is proactive and creditor-side restructuring is more reactive. Generally the debtor-side advisors will be the ones who are actively coming up with restructuring solutions and trying to gain the support of creditors, whereas creditor-side advisory involves carefully reviewing those solutions and deciding how to respond.
Note: As with everything in restructuring, you don't want to generalize too much. With many more creative out-of-court transactions it'll be the creditors, together with their advisors, pitching the company on various solutions they should pursue (e.g., as written about in the Serta guide in the members area or more recently with Envision's out-of-court work).
For the sake of brevity I won't get too much further in the weeds of this distinction. However, if you're curious about this here's a longer post on creditor-side restructuring.
A common misconception that floats around the internet is that certain restructuring investment banks - like Houlihan Lokey - primarily focus on creditor-side mandates and the rest of the prominent restructuring groups focus almost exclusively on debtor-side mandates.
This is entirely untrue as you can see from the in-court league tables above. The reality is any restructuring investment bank would rather advise the debtor-side - since the fees are higher, often by an order of magnitude - however they are more than happy to take the creditor-side mandate if they can.
Now comes the difficult part that'll require us glazing over quite a bit of detail. Traditional M&A deals are a bit more formulaic in their structure. The complicated part is modelling out complex companies over an extended time-frame to find the "right" price. In restructuring, the inverse is true: deals are often very complex, but the modelling is somewhat less intensive.
For a more in-depth dive into the restructuring solutions that bankers will come up, be sure to check out Restructuring Interviews (where the over 100-page main guide gets into this more).
But in order to set the stage, below is a simplified illustration of the restructuring pipeline...
A restructuring pitch is not a singular solution, but rather is a set of possible solutions. Once the mandate is won the restructuring group will then try to figure out what one of these solutions may actually work with the creditors (perhaps throwing out a few ideas initially to guage interest).
This is an important and often overlooked point: while in M&A you're arguing between the buyer and seller about a rather narrow set of terms in restructuring you can often be arguing about wholesale differences in the kind of restructuring being done.
In-Court vs. Out-of-Court Restructuring
As can be seen from the little restructuring flowchart above, it can appear that there is a clear delineation between out-of-court and in-court restructuring. Strictly speaking, this is true. However, many in-court restructurings will be preceded by an out-of-court restructuring that the company did years earlier that didn't allow the company to rightsize enough (e.g., Revlon).
The rationale behind trying out-of-court restructurings - even if they may not be as fulsome a solution as what could be done in-court - is that:
- An out-of-court protects existing equity holders who will not be entirely wiped out as they would almost invariably be in the case of a Chapter 11 (where the reorganized equity would go to pre-reorg creditors)
- Filing for Chapter 11, even if its done quickly and effectively through a pre-pack, is per se disruptive to suppliers, customers, and unsecured creditors; an out-of-court restructuring simply has less stigma attached to it and can be done quickly and quietly (most won't even know that it occurred)
Another important contextual point (that's really glazing over some nuance) is that the actual restructuring done out-of-court and in-court can often look similar (with the primary difference being the treatment of equity).
For example, sometimes you'll have a retailer in trouble and a restructuring investment bank will do a pitch around how to restructure the capital structure, but then it'll ultimately be decided that this should be done under a Chapter 11 as then Section 365 of the bankruptcy code (around assigning, assuming, and rejecting leases) can be utilized.
Further, you can often run into a scenario where a debtor has proposed a sensible, fair restructuring that is perhaps far better than what creditors can expect if Chapter 11 is filed. However, changes to money-terms out-of-court is often near impossible so stubborn creditors can force a company to file anyway. Thus part of doing any out-of-court restructuring is trying to convince creditors they'll be worse off if a company has to file Chapter 11 (otherwise what's the point of creditors taking a loss now -- this is where the coercion element of out-of-court work comes into play).
An increasingly popular middle ground to out-of-court and traditional in-court solutions are pre-packs (pre-packaged or pre-planned bankruptcies). These work by a company, prior to filing, essentially having commitments from all or mostly all of the relevant creditors as to what the restructuring in bankruptcy will amount to. This allows the company to fly through the bankruptcy courts in a few months.
Note: The level of pre-packs we saw last year was discussed in my post going over some of the notable Chapter 11 cases of 2022.
One thing that will not be discussed here is Chapter 7 as it's largely irrelevant to restructuring investment banking. In a Chapter 7 a U.S. Trustee takes over and liquidates all the assets of the company and disburses the proceeds to creditors via the rule of absolute priority.
So, there is simply no meaningful role for an investment banker here. Indeed, the entire point of a restructuring investment banker is to change around the capital structure, gain consent of creditors, and rightsize a company.
The Case of Neiman Marcus
Trying to articulate all the permutations that can occur in a restructuring is a nearly impossible task in a few paragraphs.
However, the case of Neiman Marcus in all of its complexity illustrates some of the major out-of-court solutions that exist in restructuring rolled together. So, let's do a quick overview.
Neiman Marcus is one of the better known luxury retail chains in the United States -- and, like almost all large brick-and-mortar retailers, had a fall from grace over the past decade or so.
Neiman in early 2019 was faced with potentially having to file Chapter 11, but was looking for solutions out-of-court if at all possible.
Neiman turned to both Lazard and Moelis - as mentioned earlier, it's rare for a debtor to have two advisors - and worked alongside creditor groups advised by Houlihan Lokey to come up with a solution.
The solution formalized in Spring of 2019 was quite complex and restructured virtually the entire capital structure of Neiman.
Such a thorough restructuring out-of-court is reasonably rare. Usually out-of-court restructurings will focus in on just one troubled part of the capital structure (perhaps because it's coming due soon or it's covenants are being stretched).
Nevertheless, in early 2019 Neiman had the following capital structure with over $4.4 billion in total debt outstanding:
- $2.8bln cov-lite TLB due Oct, 2020 (L + 325 w/ 1% LIBOR floor)
- $659 8.75% / 9.5% PIK toggle notes due 2021
- $960 8.0% cash notes due 2021
We can present this in the form of a simplified cap table below:
|TLB||$2,800||$92.0||$2,576||L + 325||2020|
|PIK Toggle||659||52.5||345||8.75% / 9.5%||2021|
In this out-of-court restructuring every major element of the capital structure was reorganized...
For the TLB, an amend and extend was done, which is almost always the first thing that restructuring investment bankers will think about when there's a term loan maturing shortly.
Amend and extends work by saying to the term loan lenders, "We'll give you a higher interest rate and some cash upfront for just extending out the maturity of your term loan a few years".
In the case of this TLB, the maturity was pushed out three years and in return the interest rate was increased to either L + 650 or L 550/100 PIK (meaning 550bps cash and 100bps in additional debt). Both carried a slightly higher LIBOR floor of 1.5%.
Further, cash was given to the TLB lenders to the tune of $550mln, which is reasonably significant for a tranche of debt that is just $2.8bln.
As you'd likely guess, Neiman didn't have $550mln in cash on hand. Instead they partly raised this funding via a new 2L Note (second lien bond) that was collateralized by $200 from MyTheresa (Neiman's relatively fast-growing e-commerce operation). This new 2L paid 8% cash and 6% PIK and matures in 2024 (again, this pushes out the maturity walls of Neiman several years).
For Neiman, this is a pretty onerous deal. They're having to take on more debt at high terms to pay down the term loan and significantly enhance the rates paid to the remaining term loan all just to get a few years of additional runway (potentially).
However, for the term loan lenders themselves it's quite a favorable deal and was reflected in the fact that the term loan traded to near par after the deal was announced.
For these lenders they get additional cash now, additional cash interest, and still have a first priority in the event of a Chapter 11 so they were feeling confident that they'd be made whole if filing were to occur (or get the majority of the reorganized equity if impaired).
Unsecured Notes Restructuring
For the Unsecured Notes, they weren't treated quite as well. The reason being is that Neiman likely understood that if they were to file Chapter 11 the recovery rates on the Unsecured Notes would be quite low, so they could take a rather large haircut in any out-of-court deal.
The Unsecured Notes - treated as one class - got $250mm in 10% preferred equity against MyTheresa (the e-commerce side of Neiman) and the remaining principal balance was converted to 3L Notes due 2024.
An important distinction is that this debt exchange - that resulted in preferred equity and notes being given in order to retire the existing Notes and thus bump out the maturity to 2024 - did not result in any new money being raised or any money being paid to the Unsecured Notes.
Instead the Unsecured Notes simply get new claims on the company that are on the one hand more secure (the 3L Notes) and more junior (the preferred equity).
A consortium of noteholders (called the ad hoc group or committee) were advised by Houlihan Lokey. The job of the restructuring investment bankers at HL would have been to advise the note holders as to whether or not this exchange was more or less favorable than what would likely eventuate in a Chapter 11, etc.
Proof that this deal was ultimately favorable - and thus that HL did their jobs well - is that the day after the deal was announced the PIK toggles increased by seven points and the cash-pay notes increased by 7.5 points.
Restructuring Solutions Summary
Detailing all the possible permutations of restructurings in such a short space is an impossible task (e.g., we haven't even touched on anything more creative like the non-pro rata uptier of Incora).
However, Neiman's out-of-court restructuring in early 2019 was comprehensive enough to showoff many of the bread and butter solutions that rx bankers will turn to when coming up with an idealized restructuring to pitch a debtor.
Unfortunately for Neiman their out-of-court restructuring fell a bit flat. With the events of early 2020 their FCF - and thus their liquidity - began to evaporate rapidly and they filed Chapter 11 in May.
Interestingly, their Chapter 11 has also given rise to a bizarre scandal involving a distressed debt hedge fund and a former Navy Seal you can read about on Bloomberg Law.
The path that Neiman has taken is not uncommon. The preference of nearly all parties involved pre-filing will be for there to be an out-of-court restructuring if at all possible (unless creditors think that the company is invariably going to have to file and that their in-court recoveries will be diminished by doing a proposed out-of-court deal).
Below is a simplified little flow chart that may solidify your understanding a bit -- again, this is covered much more in the overview guide given our space constraints here...
Note: This post was originally published a few years ago, so the points below are briefly touching on late-2022 dynamics -- for some more up-to-date and more in-depth talking points, be sure to check out my overview of Chapter 11 cases in 2022 and my post on what will (likely) inform the next restructuring cycle.
One of the things that makes restructuring so unique - from the junior perspective - is that you'll be dealing with such a wide array of industries and restructuring solutions.
Further, during your time in restructuring - whether that's a few years or a few decades - you'll notice trends in the types of companies in need of restructuring and the strategies used to rightsize them.
When I did my first summer analyst stint in restructuring, oil and gas made up a large part of the transactions being dealt with. Retail was a close second.
Now so many oil and gas companies have restructured that even with lower O&G demand there are perhaps fewer O&G filing than one would imagine.
On the flip side, while many retail companies have notably restructured over the past four to five years, the events of 2020 accelerated that trend and companies within the "consumer discretionary" industry - which is largely composed of retail - was by far the biggest category of filers.
Here's a good chart from S&P global recapping the filings from 2020 by sector (in 2022, consumer discretionary filings fell significantly from their historic trend partly due to excess savings of consumers and the margin expansion many companies enjoyed)...
One oddity of 2020 and early-2021 - among the many that existed - was that while Chapter 11 filings were up and some restructuring investment banks needed to turn down mandates, debt capital markets were astoundingly strong.
One thing you should always keep an eye on are the indices for BBB (lowest investment grade rating), BB (highest speculative grade rating), and CCC (lowest meaningful speculative grade rating) rated debt and general trends in volume and spread.
Beyond the fact that these spreads came in to roughly where they were in the beginning of 2020 by the end of 2020 - which was nearly their all-time-lows - there are a few other things to note about what has happened during this period:
- BBB contains the largest amount of investment grade debt
- BB contains the largest amount of speculative grade debt
- YoY issuers of CCC debt increased by ~100%, and the notional value of that debt rose by ~40%
Practically speaking, for the world of restructuring, this hot debt market allowed for many creative restructurings to take place that involve new money issuance as well (due to the strong demand from credit funds to place money somewhere that they can get decent yield).
The Tupperware Out-of-Court Restructuring Deal
Consider the case of Tupperware, the company that makes plastic containers for food and whatnot.
Tupperware, advised by Moelis, was facing down $600mm in Senior Notes (4.75%) coming due in 2021. As we went over in the overview guide, this is a classic case of a company needing to deal with a maturity wall and bringing in restructuring investment bankers early to try to get around it.
The Senior Notes were trading at a touch under 50 cents on the dollar due to the likelihood of Tupperware eventually needing to file. However, Tupperware had quite permissive debt documents for its revolver and was able to draw down $175mm in cash that it then used in order to do a tender offer with some of the Senior Notes.
This means they essentially went to their Senior Notes and said, "Hey, obviously these Notes are trading at a heavily impaired level and if we end up having to file Chapter 11 your recovery value may be even less than where the debt is trading now, so to make everyone's life easier we'll just give you forty-five cents on the dollar now to retire these Notes."
The first tender went so well that another was done to retire even more Senior Notes. However, Tupperware wasn't in the clear quite yet. Those Senior Notes that didn't take either tender offer hired an advisor of their own to try to maximize their position.
The remaining note holders saw that they potentially had leverage (which they did) to continue to holdout and perhaps either a) exchange their debt into more senior, higher paying debt or b) be made whole (instead of having to take a serious haircut, as the other tender offers provided).
This leverage was exacerbated by the fact that Tupperware was a beneficiary of increased demand for their products due to the pandemic and, because of this and their diminished debt load, Angelo Gordon and J.P. Morgan swooped in to provide two term loans of an aggregate amount of $275mm.
These term loans weren't cheap. You can see the pricing terms in the SP Global link above, but essentially Tupperware is paying cash interest of just shy of 10% (when accounting for the LIBOR floor, which sets a minimum level of LIBOR).
The proceeds of these term loans, along with existing cash on hand, was earmarked to be utilized to redeem the remaining Senior Notes (which at the time totalled ~$380mm after ~$220mm were redeemed via the two tenders).
As a result, with the announcement of the new term loan facilities, the Senior Notes traded back to par. Remember that the initial tender was at forty-five cents on the dollar and the Senior Notes at the time were trading roughly around that!
So while it was risky for the remaining Senior Note holders to hold-out, in the end it did pay to hold out (or, conversely, to buy at heavily distressed levels prior to the notes trading up to par).
In the end, Tupperware completely refinanced their Senior Notes, which represented a maturity wall that could have forced the company to file Chapter 11 in 2021. As a consequence, Tupperware does not have any maturities coming due until the aforementioned new term loans come due in Q4 2023.
This pushing out of maturities buys the company time to continue to turn around the business and hopefully replace the existing term loans with cheaper debt.
This is really an idyllic restructuring transaction and Moelis deserves credit for how well it was executed (although it did help that the events of 2020 provided a tailwind to the underlying business!).
So, Tupperware was able to retire ~$220mm of their Senior Notes at a heavy discount, raise new debt that won't mature until Q4 2023, and then retire the remaining amount of Senior Notes thus giving the company two more years to continue to turn things around.
This out-of-court transaction also has the benefit of not diluting the existing equity of the company and, as you would expect, equity holders loved that. While the equity reached a low of $1.15 in mid-march, the equity is now flying at around $33.00.
Restructuring investment banking titles follow the same format as you see in traditional investment banking groups where you have:
- MDs / Partners
And, as in other areas of investment banking, there are clear responsibilities and expectations attached to each role.
Analysts are responsible for pretty much everything from setting up phone calls with creditors to discuss proposals, to doing the modelling behind the deals themselves, to creating pitch decks. There's a lot that'll fall on your plate.
Given that so much of the work in restructuring is novel, there aren't little model templates like you'll frequently use in M&A, which can make the work particularly grueling.
Analyst hours at top firms will routinely get to the 80-90 hour level and it will definitely feel like you've been working 80-90 hours a week (trust me).
With all that being said, analysts do generally tend to leave for the buyside (e.g., distressed debt hedge funds, private equity funds, etc.) after just 12-24 months and the hours do get quite a bit better if you choose to stay around.
In more traditional areas of investment banking, associates are responsible for keeping a pitch or deal on the right tracks. They make sure the analyst knows what work they need to do, they review the work of the analyst, and they communicate up the chain of command to get feedback.
This is all true for restructuring associates as well. However, restructuring associates will also often be working directly in the model themselves and doing some of the drudge work that normally is reserved just for analysts in M&A.
This is partly due to the modelling in restructuring often being quite undefined and complicated. As a result, if a deal team only has one analyst and one associate on it, then it benefits the team to have two different sets of eyes actively on the model.
In restructuring, VPs have a role that is perhaps a bit more analogous to seasoned associates in M&A.
VPs will not be going out and soliciting deals, but they will be talking to currently engaged clients about how a deal is evolving, going to pitches, etc.
Further, VPs will no longer be working directly in the model or the deck themselves. Instead they'll simply be reviewing the decks (finished PowerPoint slides) and marking them up for any changes.
At any given time, VPs will be on a number of different deals and will be responsible for making sure everything is on track below them and will be communicating most directly with the MD.
Managing Directors (MDs) are generally the highest title in restructuring. Some groups will also have a title like "Senior Managing Director" or "Partner" -- all of which just reflect more experience at the MD level.
MDs - just like in M&A - are ultimately responsible for bringing in business. Their job is to get in front of potential clients, pitch some solutions, and then (if they get the mandate) figure out the right solution and get it across the finish line.
MDs will generally communicate down the chain of command what kind of restructuring solution they're thinking of for a company and it will be the responsibility of the VP, associate, and analyst to put together a deck illustrating how the solution would look.
Restructuring Investment Banking Salaries
Restructuring groups at "elite boutiques" like PJT, Evercore, etc. will more-or-less pay the same as the M&A groups at those banks at the lower levels (e.g., below VP). However, compared to M&A groups at Bulge Brackets the compensation is significantly higher.
Further, as you get more senior in restructuring - especially getting into the VP years - the compensation does tend to outpace M&A. This is largely due to how few people have a restructuring skillset and how high the pay is on the buy-side (thus forcing up senior sell-side compensation).
Below is a brief (generalized) illustration of compensation at top restructuring investment banks.
For analysts the all in compensation will be between $150,000-$220,000 per year depending on which group you end up with.
For associates - who can be just three years out of undergrad or fresh from getting their MBA - the compensation is around $250,000-$350,000 per year.
For VPs, the compensation gets more variable by bank and is dependent on the number of years in the role, but is generally $400,000-$700,000.
For MDs, the compensation is too variable to possibly give a tight range, but it will likely be somewhere in the low seven figures on average ($1,000,000-$3,000,000) with some of those who have been in rx for decades, or who have brought in a lot of business that year, getting substantially more.
I should caveat these salaries by noting these apply to Tier 1 firms in the United States and that compensation for RX in Europe and Asia is generally lower. With that said, rx comp in those geographies generally outpaces M&A comp as well.
Note: The above figures are more from the pre-pandemic era. While actual comp has gone up quite a bit (especially at the analyst and associate level) over the past few years, it's come through salary bumps. It's still a bit of an open question where the overall comp benchmark for juniors will really end up normalizing. It'll definitely be higher than before -- it's just a question of how much higher.
A question asked in nearly every restructuring interview is why you're interested in restructuring. In fact, it's so common that I dedicated an entire post to it.
The reason why it's asked so often is the question allows an interviewer to understand if the interviewee understands what makes restructuring so unique. As those who have gone through the Restructuring Interviews guides know, having a contextual understanding of restructuring is the singular best way to stand out in an interview at the analyst or associate level.
For the sake of brevity - irony aside, given how long this post is - the following are reasons why restructuring is so unique relative to other areas of banking:
- Clients that are engaged will almost invariably need to do something in order to rightsize (the question is just what the right restructuring solution is).
- There is no known, right answer as to what should be done. Instead it's up to the restructuring investment bankers to figure out what restructuring solution puts the company in the best position to succeed.
- Understanding what the right restructuring solution is requires a deep understanding of the entire capital structure, underlying debt documents, and future prospects of the company.
- Every deal is unique - although often drawing on the same elements - and is in constant flux due to negotiations taking place with creditors.
- Restructuring, more than any area of banking, draws on psychology, finance, and law in an often chaotic blend.
Of course, there are downsides to restructuring just like there are with any role in high finance. Most would probably agree that the primary downside is that you are somewhat constrained in your ability to leave high finance -- or at least do so seamlessly.
For example, some in M&A will end up burning out at some point and end up moving to a corporate development job. Restructuring bankers can't really do that as the skillset they develop is (obviously) much less applicable to large healthy companies.
Instead, the exit opportunities for restructuring bankers are all still within high finance where the pay is high, the hours are long, and the stress is unavoidable. This sounds great in theory but there does come a time when many in banking want to go to a more lifestyle-oriented role, and those are a bit tougher to land coming from rx (although areas like direct lending, etc. definitely will provide preferable hours relative to MF PE, etc.).
Part of the rationale behind the creation of Restructuring Interviews was to shed some light on what restructuring investment banking is really all about in practice.
As you've likely begun to see, restructuring can get quite complicated and it's terribly difficult to try to distill it all down in a post like this. But hopefully this has helped you understand at least the broad contours of restructuring and cleared up a few misconceptions (e.g., that restructuring is all about in-court work!).
If you want an even longer deep dive into restructuring - where I really get into the weeds of how restructuring solutions are structured, what deliverables look like, and provide hundreds of interview questions - then be sure to check out the guides.
Putting together the guides has been a little hobby of mine (that's definitely not been the best use of my extremely limited free time) but it's been very rewarding to see how much they've helped those looking to break into rx.
And, of course, there are many posts on the blog you can check out as well -- here are a few more recent ones worth reading:
- The Top 15 Restructuring Interview Questions
- Chapter 11 Cases in 2022: A Tale of Two Halves
- The Next Restructuring Cycle
- Structural Subordination Overview
- Distressed Debt Interview Questions
The world of restructuring is incredibly interesting and I hope this post has at least shed a little bit of light on how this world works. Be sure to let me know if you have any questions.