Restructuring & Distressed M&A Interview Questions for Finance

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• Restructuring is the process of reorganizing a company’s financial or operational structure to restore stability and viability. Companies typically restructure when they face financial distress, covenant breaches, or unsustainable leverage.
• Restructuring may involve renegotiating debt terms, reducing leverage, selling non-core assets, or operational turnarounds. The goal is to preserve value and avoid liquidation.
• Common drivers include excessive debt, declining revenues, rising costs, liquidity shortfalls, or industry downturns.

Valuing a distressed company requires adjusting methods because its future cash flows and market multiples are less reliable.

• DCF is less useful, since projections may be unrealistic. Instead, liquidation value or asset-based methods often matter more.
• Trading comps should be adjusted downward, since distressed firms typically trade at lower multiples.
• Recovery value for creditors becomes central, since equity is often wiped out in distress.

Liquidation value represents the net cash that could be generated by selling a company’s assets and paying off liabilities if the business were shut down.

• In distress, liquidation value often sets the floor valuation for creditors deciding whether to restructure or liquidate.
• It helps determine whether a company is worth more as a going concern or in liquidation.
• Secured lenders especially focus on liquidation value, since their claims are tied to asset recoveries.

DIP financing is new debt provided to a company during a bankruptcy reorganization process, such as Chapter 11 in the U.S. It gives the company liquidity to keep operating while it restructures.

• It usually has super-priority status, ranking above existing debt.
• Ensures the company can pay suppliers, employees, and operating expenses during restructuring.
• Lenders often gain strong influence over the process because their money is critical to keeping the company alive.

Side Note: Chapter 11 refers to a section of the U.S. Bankruptcy Code that allows companies to reorganize rather than liquidate. The company stays in business as a “debtor-in-possession” while negotiating new terms with creditors under court supervision.

Creditors and shareholders often have conflicting interests.

• Creditors: Seek to maximize debt recovery, prefer conservative strategies, and may push for debt-for-equity swaps if repayment isn’t possible.
• Shareholders: Hope to preserve equity value, but in severe distress they are often wiped out since creditors have priority in liquidation.

In distress, the focus shifts from growth to liquidity and solvency.

• Leverage ratios: Debt/EBITDA, Debt/Equity
• Coverage ratios: Interest Coverage (EBIT/Interest), Fixed-Charge Coverage
• Liquidity metrics: Current Ratio, Cash Burn Rate, Free Cash Flow
• Covenants: Whether the company is at risk of breaching debt agreements

Creditors may accept equity in exchange for reducing or cancelling debt when they believe the company has more long-term value as a going concern than in liquidation.

This approach reduces leverage, improves the balance sheet, and gives creditors upside if the company recovers. It is common when liquidation value is low relative to the potential enterprise value.

Distressed deals often move faster, involve lower valuations, and carry higher risks than traditional M&A.

• Buyers usually focus on downside protection, sometimes acquiring only selected assets rather than the whole company.
• Limited time and liquidity often reduce due diligence.
• The seller may be under pressure from creditors or bankruptcy courts.

Synergies and turnaround benefits are harder to realize in distressed contexts.

• Cost synergies may be overstated, since liquidity constraints limit execution.
• Revenue synergies are especially unreliable when the business model is already under pressure.
• Management distraction, employee turnover, and creditor oversight make integration harder.

Several recent examples illustrate the dynamics:

• Hertz (2020): Filed for bankruptcy during COVID-19. Restructuring included asset sales and DIP financing, and equity surprisingly retained value due to market conditions.
• Toys “R” Us (2017): Could not service heavy LBO debt, filed for bankruptcy, and liquidation followed after failed restructuring attempts.
• Thomas Cook (2019): Collapsed after liquidity issues and high debt; rescue talks failed and assets were sold off in pieces.

These cases highlight themes of excessive leverage, weak liquidity, and overoptimistic turnaround assumptions.