Prof. Ian Giddy New York University Structured Finance: Restructuring

Prof. Ian GiddyNew York University

Structured Finance:Restructuring

Copyright ©2002 Ian H. Giddy Structured Finance 2

Structured Finance

Corporate financial restructuring

Structured financing techniques

Asset-backed securitization


What is Corporate 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

Improve

capitalization

Change ownership

and control

Improve

debt composition

Novartis


Operating Restructuring

The increase in value that comes from the operating side:

Better operating margins (usually economies of scale ie lower costs)

or Future 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

Economic

Profit

Source: Ciba Specialty Chemicals*Net Operating Profit After Tax


Novartis: Financial Restructuring

Fixed

Assets

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 taxes Higher debt capacity Better use of idle cash


Corporate Restructuring:It’s All About Value

How can corporate and financial restructuring create value?

Operating

Cash

Flows

Debt

Equity

Assets Liabilities

Fix the business

Or fix the financing


Restructuring Checklist

Figure out what the business is worth now

Use valuation model – present value of free cash flows

Fix the business mix – divestitures Value assets to be sold

Fix the business – strategic partner or merger

Value the merged firm with synergies

Fix the financing – improve D/E structure

Revalue firm under different leverage assumptions – lowest WACC

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

Fix the kind of debt or hybrid financing

What mix of debt is best suited to this business?

Fix management or control Value the changes new control would produce


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

Debt

Equity

Achieve lowest weighted average cost of capital

May also affect the business side


Capital Structure: East vs West

VALUE OFTHE

FIRM

DEBT

RATIO

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

Restructuring debt to make it cash-flow responsive

Converting debt into equity Securing asset-backed funding Securing mezzanine and subordinated

debt financing Securing equity-linked and hybrid

financing Raising new equity


Case Studies

Evaluate the financial restructuring taking place at:

Conseco Getronics Dynegy

www.stern.nyu.edu

www.giddy.org

Documents

Prof. Ian Giddy New York University Structured Finance: Restructuring