Restructuring 101

When people think of investment banking, they tend to think exclusively of mergers and acquisitions (M&A). Although M&A does classify as investment banking, it forms only one of many divisions at an investment bank, with these divisions working in unison to solve companies’ complex financial problems (for more information about the different divisions at an investment bank click here). One segment of investment banking that tends to fly completely under the radar is restructuring (RX). This article aims to explain what RX is, why it is less known, and the career path that RX investment bankers follow.

What is Restructuring?

Companies are financed using an optimal combination of debt and equity, also known as a capital structure. Debt and equity each have their own pros and cons, so a company’s management must consider this when deciding how best to fund its ongoing operations. The issue with taking on debt is that companies must pay interest, similar to how any individual must pay interest on a bank loan. If a company doesn’t generate enough cash flow to be able to finance its debt or if it breaks a certain bond covenant, such as EBITDA/Interest coverage, then serious problems will follow. This situation is known as financial distress and can lead to bankruptcy, liquidation, or distressed sales. Therefore, RX investment bankers advise companies on how they can modify their capital structure to survive such situations.

Unlike M&A, which focuses on value creation, RX focuses on minimising losses and is counter-cyclical in nature, meaning that RX deals increase during economic downturns.

Possible Solutions to Financial Distress

Chapter 7 Bankruptcy – Also known as ‘liquidation' bankruptcy as at this point a company can no longer reorganise their capital structure and thus must sell off some assets to pay their creditors. In this case, RX investment bankers carry out significant valuation work to assess the value of each asset and then look for potential buyers.

Chapter 11 Bankruptcy – Also known as ‘reorganisation’ bankruptcy as companies have the opportunity to reorganise their capital structure and re-establish themselves in their respective industry. This can be done by negotiating to change the terms on their outstanding bonds or by raising new debt or equity.

Out-of-Court Assignments – These can let a company potentially avoid a bankruptcy filing as they are done outside of the courtroom but come at the cost of the company losing any negotiating leverage.

Distressed Sale – As a last resort, a company may look to sell its assets privately to any available investor at a steep discount. Advantageously, a distressed sale can be discreet, allowing a company to avoid negative publicity.

Which Firms Do Restructuring?

A significant reason as to why RX is less known is that many bulge bracket banks, such as Goldman Sachs and J.P. Morgan, don’t offer RX services. This is due to conflicts of interest that would arise from a big investment bank looking to advise a distressed company. Consequently, the primary investment banks that operate in this segment are elite boutique banks with no balance sheet. They strictly offer advisory services and can work with either the debtor (companies) or creditors (potential investors).

The top firms in RX (Europe) include PJT Partners, Lazard, Houlihan Lokey, Rothschild & Co, Moelis & Co, among others. It tends to be a very niche market.

A Career in RX

If you’re looking to break into RX, the career path is the same as any other investment banking role: Analyst, Associate, Vice-President, Managing Director/Partner. Differences arise when you compare the type of work you will be doing. As a RX analyst, you will do all the standard work an M&A analyst does but under more sensitive situations. Legal knowledge and an understanding of debt are also essential as analysts spend a lot of time reading through contracts and analysing credit agreements. RX is less process-oriented than M&A as virtually every deal is unique and requires a deep understanding of the distressed firms’ capital structure and future prospects.

At entry-level, the compensation is roughly the same as M&A, but the hours can be longer. At higher levels however, RX investment bankers develop a highly specialised skillset and can accordingly command greater pay than their M&A counterparts. The downside is that after several years you can become pigeon-holed into RX, limiting exit opportunities into other industries.

Final Thoughts

RX, more than any other area of banking, utilises a chaotic combination of finance, law, psychology, and creativity. It arguably offers the most interesting work of any investment banking group and is a great start to a career in finance. The pandemic caused an increase in RX deals as companies struggled for liquidity. We are beginning to emerge from the disruption but there is still a strong inclination that RX deal flow will remain high for the foreseeable future.