Analysing and Restructuring Distressed Corporate Debt

The global economic crisis engulfing the global economy as a result of the Covid 19 pandemic, will have a deeply damaging impact on corporate clients across the world. Regardless of the depth and intensity of the crisis, many corporate clients are going to face severe financial problems at a time when debt levels are at historic highs and the credit cycle was already turning.

The principal objectives of this programme are to provide delegates with a developed understanding of the Early Warning Signals that indicate potential problem loans in corporates as well as methods of resolving recovery of distressed debt through problem loan workouts and debt recovery. This course therefore assesses a number of different problem loan workout solutions that are implemented across a wide range of jurisdictions in Western Europe and North America.

Day One 

Introduction to the aims of the course

Session 1 - Fundamental concepts in Debt restructuring

• The financial and economic impact of the COVID 19 crisis on corporate performance and rising distressed debt levels
• The impact of the current economic crisis on the leveraged loan market and the dangers to bank stability of covenant light lending
• Identification of key early warning signals that will arise as a result of the current economic and financial crisis.
• Principal issues posed by non-performing loans and distressed debt
• Impact on the client and Impact on shareholders and stakeholders
• Loan foreclosure versus debt restructuring – the lose - lose scenario
• Alternatives to company foreclosure in debt recovery
• Review of the concepts of restructuring, turnaround and corporate recovery
• Debt restructuring and the potential win – win scenario
• How fast-tracking restructuring cases can improve the creditor’s position
• Understanding the strengthened position of the banker during the Restructuring process
• The importance of immediate action and the risks of inaction
• Case Study: Review of a number of high profile short restructuring case studies to underline the lessons learned for restructuring since the Financial Crisis.

Session 2 - Identifying problem loans before they turn bad – the early warning signals used in ratio analysis and quantitative analysis.

• The importance of trend analysis as part of ratio analysis
• Spotting off balance sheet items that will affect company risk profiles;
• Spotting ongoing capital expenditure needs and identifying methods of financing those needs;
• Spotting when companies fail to invest adequately in existing capacity during the crisis and the long term implications for the company.
• The impact of asset sales by management
• The review of over gearing and what can be done to assist the company to reduce financial risk
• Ratio analysis as a key tool in early warning:
  • Key financial drivers and the need for constant vigilance
  • The problems with overreliance on the financial statements.
• Developing underlying assumptions of quantitative analysis;
• Trend analysis and the importance of identifying the trend to understand the causes of distress;
• Where to look for the manipulation of the accounts and creative accounting by management in order to improve the perceived performance of the company.
• Red Flag lists and assessment of three principal Red Flag areas covering
  • Financial red flags, Business red flags, Internal red flags
• The Z score and its use in identifying potential corporate failure
• Case Study: Review of a problem loan case study’s financial statements whereby delegates will review the identify key EWS risks associated with the company going forward.
• Review of the case study of Carillion and lessons learned in poor financial management and analysis

Session 3 – Overtrading, Liquidity and Working capital management in the distressed client

• The importance of good working capital management especially during the current economic crisis
• How to spot when the company is burning cash unconsciously.
• Measure to identify potential problems with short term liquidity
• Why the liquidity crisis can and will kill the going concern
• The impact of poor working capital management on company liquidity and survival
• Signs of overtrading and over aggressive management pricing policy
• The importance of due diligence and understanding how management negotiates with its customers and suppliers and manages working capital.
• Calculating the net working capital needs of the company
• Methods in improving working capital generation
• The importance of liquidity in distressed corporates
• Managing and improving liquidity during the current COVID pandemic; how managers should be controlling liquidity.
• Methods in improving corporate liquidity and cash flow through improved working capital management
• Methods implemented by turnaround managers to increase liquidity in companies
• Introduction to different risks in Emerging markets and the Middle East
• Credit risk, business risk, operating risk, management risk
• Risk identification in developing markets
• Risk profiling to identify the top risks that can affect the company
• Risk mitigation through different strategies
• Case Study: during this session, the delegates will analyse the working capital needs of a company and assess how working capital problems can threaten the going concern. They will also assess how the corporate can increase its liquidity through intelligent working capital management. We will draw comparisons with the demise of Carillion and understand why poor working capital management was central to the demise of the UK contractor.

Session 4 - Early Problem analysis of Macro and Qualitative factors for corporate clients

• Understanding the ‘big picture’ and potential pitfalls for the company
• Why external risk crystallisation can have a game changing impact on the company’s long term survival – The example of Nokia
• Assessing market problems and competitive forces in the client company’s principal markets as well as the client’s position in the market
• The need to identify the client’s Critical success factors and delivering success; the paucity of any being a strategic EWS
• Poor corporate governance and its impact on the company’s ability to recover from its underlying problems
• Management inaction and its impact on company recovery
• Understanding a client’s general business environment
  • The application of the PESTEL model to EWS identification and market assessment
• Assessing the competitive forces at work in a client’s company’s industry with a view to understanding its ability to make profits
  • Application of Porter’s Five forces to understanding competitive pressures on the problem loan
• The assessment of the strength of a company’s product and service portfolio and its chances of survival as a going concern
  • Product Life Cycle
  • Portfolio Analysis
• Qualitative Case Study: The delegates will review a new case study to assess the external risks that the company is potential facing. They will use the qualitative analysis models introduced during the session to assess potential EWS and their impact on company performance and the going concern.

Day Two

Session 5 – Assessing Corporate risk through cash flow forecasting

• The importance of Cash flow in terms of debt repayment and why analysing cash flow is paramount to understanding the potential of the company to honour its debt repayment
• Financing and poor cash flow statement presentation
• Why EBITDA does not spell cash flow and how using EBITDA as a measure of debt capacity is so highly dangerous for the going concern
• The Debt Service Coverage Ratio and its role as a principal early warning signal
• Why all risk analysis and mitigation should ultimately focus on the Debt Service Coverage Ratio
• Application of the Interest Coverage Ratio and acceptable levels for the ratio
• Creating the cash flow from the P&L and Balance Sheet
• Use of financial modelling to assess the impact on the cash flow of risk crystallisation
• Workshop: During this workshop the delegates will practice putting together a problem loan cash flow statement under IAS rules (7) in both the direct and indirect method, using the company’s Balance sheet and P&L account.

Session 6 – When the company defaults - Reviewing the 10 point restructuring plan and using Cash flow forecasts to understand the recovery plan

• Assessing what can be done to the client in default – summary and review of key steps that can be taken by the corporate banker
• Application of decision trees to deciding how to deal with the client in default.
• The importance of identifying the underlying cause of the problem facing the client
• Review of the 10 point restructuring plan to ensure control of the process
• The importance of believing the recovery story before agreeing to the restructuring plan
• Revising the company’s business plan
• Why cash flow forecasts and analysis are central to the corporate client’s recovery
• The sources and applications of cash.
• Review of The Cash flow statement of the distressed debt company
• Cash flow from operating activities and importance of different cash flow items
• Analysis of the free cash flow for debt service
• Analysis of the borrowing capacity of the client company

Session 7 - Identifying work out solutions versus insolvency solutions

• Reviewing different types of problem loan workout and corporate recovery solution
• The importance of understanding whether the problem loan can be ‘worked out’ as a going concern and belief in the recovery strategy
• When and who should provide emergency funding to save the going concern
• Review of the increasing use of debt sale as an exit route, its advantages and disadvantages
• Expectations of financial performance and financial covenants under the recovery strategy
• Assessing what to do with management during and after the restructuring process
• The essential need for trust in management during the restructuring process.
• Introduction to and application of Butler’s Matrix to identify what can be done with existing management during and after the restructuring process.
• Introduction to and application of the IFC’s matrix to identify potential recovery and restructuring strategies for the distressed debt company.
• Workshop: During this workshop the delegates will be given a private sector case study to which they will assess whether the company’s recovery strategy will be able to honour the restructuring debt repayment schedule. The delegates will apply the Butler’s Matrix to a distressed debt manufacturer to understand what should be done with management and also the IFC matrix to identify potential restructuring solutions

Session 8 – Review of different legal concepts in Corporate Restructuring and Recovery in the EU, UK and US

• The concept of automatic stay and protection of the going concern from other creditors
• Administration, Receivership and Liquidation
• Automatic stay in administration and its use in the restructuring process
• Comparison of different rescue procedures in the EU and the UK.
• Key approaches to successful debt restructuring
• Cramdown of creditors
• Position and rights of management
• Personal liability of directors
• Ranking and claims of creditors
• Time limits of filing claims
• Introduction to Standstill Agreements and controlling the banking syndicate and the action of other bilateral lenders
• Implementing the Moratorium through the Standstill Agreement
• Key concepts underlying the agreement and Automatic Stay
• Review of a draft Standstill Agreement
• Drafting the Standstill Agreement
• Review of the different corporate recovery jurisdictions across the EU, UK and US
• Automatic stay and the rights of management and directors in insolvency across different jurisdictions
• Administration and Receivership in the UK and EU
• Chapter 11 administration in the United States
• Case Study: Case Study Workshop – During this session, the attendees will review a range of case study scenarios including the CVAs of Ineos and House of Fraser in the UK and review the potential application of the different recovery methodology discussed during the session. The delegates in their project groups will also assess how they need to engage with other creditors and assess the drafting of a standstill agreement for the problem loan restructuring.

Day Three 

Session 9 - Restructuring the loan – the importance of avoiding Extend and Pretend

• Assessing when the company can and cannot be saved – Admitting and identifying the need and correct course of action for the restructuring
• Why Extend and Pretend helps no party involved in the distressed debt scenario
• Assessing the costs of liquidation versus the costs of maintaining the going concern.
• When a moratorium can be applied to save the day
• Understanding whether the financial restructuring is sufficient to save the company
• Assessing the two main elements of corporate restructuring, namely financial restructuring and organisational restructuring
• The importance of the Organisational Restructuring and the need to solve the principal causes of decline.
• Using external expert advisers to assist in understanding the depth of the organisation restructuring required to turn around the distressed debt candidate.
• The use and application of the Independent Business Review in a holistic organisational restructuring to turn around the problem loan client, permanently.
• Review of the content of the IBR and the management of each stage of the IBR’s implementation
• Workshop: Based on the IFC matrix, the delegates will assess the potential restructuring options available to them to save the problem loan candidate for financial failure. The focus will be the need to affect a long last turnaround of the problem client through the implementation of a full Independent Business Review. The delegates will be required to draft a ToR for the scope and depth of the IBR which they would require in order to understand the full depth of the problem and how to implement a full and enduring financial and operational turnaround of the company that will improve the company’s performance permanently and avoid extend and pretend. The delegates will discuss their conclusions with the rest of the group.

Session 10 - International Best Practise in Problem Loan Workout

• Company Voluntary Agreements and their application in problem loan workout
• Pre-packaged insolvency agreements, advantages and disadvantages and application in different jurisdictions
• The popularity and effectiveness of Company Voluntary Agreements in restructuring
• Implementation of Turnaround Agents and strengthening client management
• Debt and Equity Swaps as a route to recovery why these are popular with certain institutions
• The common use of loan haircuts in debt restructuring
• Implementation of hair-cuts and cash flow sharing (sharing the cash flow waterfall) with incentivised shareholders
• The increased use of debt sales of distressed debt by banks and;
• The introduction to pricing of distressed debt
• The use of warrants of PIK during restructuring and why these instruments are losing popularity.
• Workshop: The delegates will review case study examples of restructuring international best practice in action, including successful case studies, such as the case of Ineos and the lessons learned from failed CVAs (House of Fraser UK). They will also assess the option of Pre Pack insolvencies where permissible as well as debt and equity swaps and the process required to understand how the bank could recover its exposure through equity. We will discuss the frequent need to use haircuts to improve the financial position of the problem client and assess which levels of haircut are

Sessions 11 & 12  – Final, Applied Restructuring workshop

• Workshop: During these final two sessions, the delegates will review a new real estate / retail case study based in the British Midlands. They will identify the EWS associated with the problem loan and devise risk management techniques in order to assess which course of action will be needed to recover the maximum exposure possible from the problem loan client.
• They will then draft a Standstill Agreement and restructure the problem loan using forecast cash flows and the company’s business plan to assess the value of the company and the debt service coverage going forward. The delegate project teams will then present their restricted deals to the rest of the class who will act as a credit committee.

Course conclusion and evaluations

For the past 16 years, the trainer has provided training programmes to some of the world’s largest financial institutions including HSBC, EBRD and the EIB. Cooperating with a number of leading training companies, he has trained delegates from some of the largest industrial and financial institutions across the Middle East, Far East, Europe and Southern and Eastern Africa. He also lectures in a number of professional papers for the ACCA and CIMA examination boards at the Tianjin University of Finance and Economics, the leading Business School in China.

In parallel to his training, the trainer also has a 26-year career in Banking and Finance that originated in the City of London and has specialised in credit risk analysis, debt structuring and problem loan workout and debt restructuring for international corporate clients. He has worked with a number of the world’s leading financial institutions providing lending facilities or private placements worth over US$ 5 billion to the corporate sector. It is this practical, hands-on experience of credit risk analysis and balance sheet restructuring that he brings to his professional finance workshops.

Before embarking on his career in banking he acted as an Economic and Political Adviser to the Prime Minister of the Slovak Republic.

It is assumed that the professional experience of the delegates attending this course is intermediate to senior and therefore basic credit and financial EWS analysis will be assumed knowledge although we will be revisiting key areas of ratio analysis as part of the theoretical credit risk review. The workshop will focus heavily on the successful and practical implementation of this theory with real life scenarios through case study analysis.

The aims of this online programme will include:

• Background to the financial and economic impact of the COVID 19 pandemic on the global economy, on corporates internationally and on the leveraged loan market.
• Reviewing key Early Warning Signals (EWS) that indicating distress in corporate clients.
• Full review of the financial EWS of a company in distress and the danger levels of key ratios arising from the financial statements
• The importance of preserving company liquidity during the current post COVID economic and financial crisis
• Review of the different stages of crisis that companies can encounter on the road to default and what measures can be taken at each stage.
• The danger of the liquidity crisis in the company’s default
• The need to assess how companies manage their working capital financing and EWS of bad working capital management.
• Practical steps needed to alleviate a liquidity crisis in a defaulted company and avoiding ‘throwing good money after bad’.
• Identifying leading EWS that can be a portent for distressed debt including external risk crystallisation, management behaviour, poor governance
• The importance of identifying defects and mistakes in the company ahead of the symptoms of decline.
• The limitations of relying on financial analysis to identify distressed debt candidates.
• Introduction to the basic principles of debt recovery and different methods of corporate recovery and problem loan workout
• Assessing when the loan needs to be restructured, the company turned around, or put into Corporate Recovery
• Understanding when a situation can be salvaged and when it can’t.
• Understanding which trigger events can lead to the corporate restructuring
• Accepting when the financial restructuring is not enough and understanding the need to avoid Extend and Pretend
• The importance of the Operational Restructuring in achieving a permanent turnaround in the company’s operating and financial fortunes.
• Using external advisers and the Independent Business Review for successful and complete restructuring
• Using international frameworks and guidelines from International Financial Institutions in guiding the restructuring method and strategy
• Implementing a practical 10 point plan for effective restructuring of distressed debt
• Reviewing a wide range of different restructuring case studies to understand what went right and what went wrong
• Review of principal legal solutions for debt recovery across a range of different jurisdictions
• Implementation of the standstill agreement in controlling the restructuring process where other bilateral lenders are involved.
• Understanding and identifying strategies for recovery for the problem loan candidate
• Using cash flow forecasts to understand the feasibility of the Corporate recovery strategy
• Implementing a company turnaround and steps required for a successfully recovery of the client business
• Reviewing different recovery methods that can be implemented during different circumstances
• The use and advantages if CVAs and Pre pack insolvencies
• When to apply debt to equity swaps and the implementation of warrants in restructuring

Methodology

This online training programme will be delivered through a highly interactive online platform through which the delegates will be able to fully engage with the trainer and also solve case study problems with their colleagues.  Delegates will work through case study exercises and questions in project groups and with the course trainer.

The learning techniques will be a mixture of formal presentations, written materials, assignments and case studies with a heavy emphasis on learning through analysing practical examples of corporate problem loan. All the case studies will be used from real-life working examples. Sharing already developed knowledge and learning to work closely in solving practical issues, is a core to the learning methodology of this programme.

The workshop is designed with active delegate participation as a core theme of the workshop. Delegates will be required to present their findings and solutions to their colleagues in class via the screen sharing option available through the online platform. Pre course reading and preparation will be required of the delegates.

Target audience

This programme is designed for relationship managers and the banking team responsible for monitoring the client company salvage the problem loan and thus avoiding corporate recovery as well investment officers from equity funds. EWS and problem loan analysis will be undertaken from a full 360 degree holistic approach to credit risk including both quantitative and well as strategic, managerial and qualitative analysis.

The workshops will use a range of case study companies located across Europe and North America, to provide the core learning tools for this problem loan course. We will be drawing on a range of international best practice tools for problem loan workout and applying these to the context of the existing business environment in the light of the COVID 19 pandemic.