Corporate Financial Restructuring - NYUpages.stern.nyu.edu/~igiddy/restructuring.pdf · Ian H. Giddy/NYU Corporate Financial Restructuring-12 Copyright ©2003 Ian H. Giddy Corporate

Ian H. Giddy/NYU Corporate Financial Restructuring-1

Prof. Ian GiddyNew York University

Corporate FinancialRestructuring

Copyright ©2003 Ian H. Giddy Corporate Financial Restructuring 3

Corporate Financial Restructuring

Corporate restructuring –business and financial Structured financing techniquesDistress-induced restructuringMergers, divestitures and LBOs



A Simple Framework

A company is a “nexus of contracts” with shareholders, creditors, managers, employees, suppliers, etcRestructuring is the process by which these contracts are changed – to increase the value of all claims.Applications:

restructuring creditor claims (Conseco);restructuring shareholder claims (AT&T);restructuring employee claims (UAL)


Example

Conseco

Debt

EquityBondholders were offered the chance to get a more senior position in exchange for deferring repayment of their debt.



“Nexus of Contracts”

Shareholders

Senior lenders

Subordinated lenders

Franchisors

Salespeople

Management


Examples

Novartis – merged and divestedGetronics – solving the creditor-shareholder claim dilemma?Dynegy – restructuring assetsSAP – upgrading shareholder control rightsWestpac – structured finance



Case Studies

TDI – seeking the optimal financial structureSealed Air – borrowed heavily and paid a huge dividendFord – leveraged its financial assetsLoewen Group – what restructuring might avert bankruptcy?


Bookmark this or use giddy.orgTA:Toms Silins [email protected]



Blackboard – On-line Problem Sets


Average Impact of Restructuring on Company Performance

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Portfolio Financial Organiz.

Source: Bowman et al, “When Does Restructuring Improve Economic Performance?”



Why and How

Why restructure? What is the fundamental problem to be solved?

How restructure?Create or preserve value, and negotiate how the gains are distributed

When restructure? Pre-emptive, or under duress?

Implementing restructuring


Why Restructure? Some Reasons

Address poor performanceExploit strategic opportunitiesCorrect valuation errors



How Restructure?

Fix the businessFix the financingFix the ownership/controlCreate or preserve valueNegotiate distribution of the value


How Restructure? Some Obstacles

There are market imperfections or institutional rigidities that make it difficult for the firm to recontractThese include:

Transaction costsTaxesAgency costsInformation asymmetries

Example: The restructuring of USX



Implementation

Restructuring: Any substantial change in a company’s financial structure, or ownership or control, or business portfolio.Designed to increase the value of the firm

Restructuring

Improvecapitalization

Change ownershipand control

Improvedebt composition

Novartis



Operating Restructuring

The increase in value that comes from the operating side:Better operating margins (usually economies of scale ie lower costs)orFuture increased sales/profits from higher growth

Novartis



Value-Based Management

Sales

Operating margin

Notional taxes

Net Working capital

Net Fixed Capital

Goodwill

NOPAT*

Invested Capital

Cost of Capital

EconomicProfit

Source: Ciba Specialty Chemicals*Net Operating Profit After Tax



Novartis: Financial Restructuring

FixedAssets

Debt

Equity

Assets LiabilitiesFixed the cash

and working capital

Fixed the capital

structureCash


Financial Restructuring

The increase in value that comes from a purely financial effect:Lower taxesHigher debt capacityBetter use of idle cash



Corporate Restructuring:It’s All About Value

How can corporate and financial restructuring create value?

OperatingCashFlows

Debt

Equity

Assets Liabilities

Fix the business

Or fix the financing


Restructuring Checklist

What mix of debt is best suited to this business?

Fix the kind of debt or hybrid financing

What can be done to make the equity more valuable to investors?

Fix the kind of equity

Value the changes new control would produce

Fix management or control

Revalue firm under different leverage assumptions – lowest WACC

Fix the financing – improve D/E structure

Value the merged firm with synergies

Fix the business – strategic partner or merger

Value assets to be soldFix the business mix – divestitures

Use valuation model – present value of free cash flows

Figure out what the business is worth now



Valuation is a Key to Unlock Value

Value with and without restructuringConsider means and obstaclesWho gets what?Minimum is liquidation value

Valuation

Going Concern LiquidationAfter Restructuring


Getting the Financing RightStep 1: The Proportion of Equity & Debt

Debt

Equity

Achieve lowest weighted average cost of capitalMay also affect the business side



Capital Structure: East vs West

VALUE OFTHE

FIRM

DEBTRATIO

Optimal debt ratio?

Nokia TPI


See Saw

Business Uncertainty

Financial Risk

Operating Leverage

Financial Leverage



Getting the Financing RightStep 2: The Kind of Equity & Debt

Debt

Equity

Short term? Long term?Baht? Dollar? Yen?

Short term? Long term?Baht? Dollar? Yen?

Bonds? Asset-backed?Convertibles? Hybrids?

Bonds? Asset-backed?Convertibles? Hybrids?

Debt/Equity Swaps?Private? Public?Strategic partner?Domestic? ADRs?

Debt/Equity Swaps?Private? Public?Strategic partner?Domestic? ADRs?

Ownership & control?Ownership & control?


Restructuring and Structured Finance: Examples

Restructuring debt to make it cash-flow responsiveConverting debt into equitySecuring asset-backed fundingSecuring mezzanine and subordinated debt financingSecuring equity-linked and hybrid financingRaising new equity capital



The Challenge

Solving corporate financing problems by creating securities that are responsive to investors’ and issuers’ needs, constraints and views.Example: Getronics (how did this work?)


Case Studies

Evaluate the financial restructuring taking place at:GetronicsDynegyConseco



Contact Info

Prof. Ian H. GiddyNYU Stern School of BusinessTel 212-998-0426; Fax [email protected]://giddy.org

Documents

Corporate Financial Restructuring - NYUpages.stern.nyu.edu/~igiddy/restructuring.pdf · Ian H. Giddy/NYU Corporate Financial Restructuring-12 Copyright ©2003 Ian H. Giddy Corporate