Corporate Financial Restructuring

Size: px

Start display at page:

Download "Corporate Financial Restructuring"

Mildred Stevens
5 years ago
Views:

1 Corporate Financial Restructuring-1 Corporate Financial Restructuring Prof. Ian Giddy New York University Corporate Financial Restructuring Corporate restructuring business and financial Structured financing techniques Distress-induced restructuring Mergers, divestitures and LBOs Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 3

Corporate Financial Restructuring-2 A Simple Framework A company is a nexus of contracts with shareholders, creditors, managers, employees, suppliers, etc Restructuring is the process by which these

2 Corporate Financial Restructuring-2 A Simple Framework A company is a nexus of contracts with shareholders, creditors, managers, employees, suppliers, etc Restructuring 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) Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 4 Example Conseco Debt Equity Bondholders were offered the chance to get a more senior position in exchange for deferring repayment of their debt. Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 5

3 Corporate Financial Restructuring-3 Nexus of Contracts Franchisors Senior lenders Salespeople Subordinated lenders Management Shareholders Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 6 Examples Novartis merged and divested Getronics solving the creditorshareholder claim dilemma? Dynegy restructuring assets SAP upgrading shareholder control rights Westpac structured finance Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 7

Corporate Financial Restructuring-4 Case Studies TDI seeking the optimal financial structure Sealed Air borrowed heavily and paid a huge dividend Ford leveraged its financial assets Loewen Group what

4 Corporate Financial Restructuring-4 Case Studies TDI seeking the optimal financial structure Sealed Air borrowed heavily and paid a huge dividend Ford leveraged its financial assets Loewen Group what restructuring might avert bankruptcy? Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 8 Bookmark this or use giddy.org TA: Toms Silins ts664@stern.nyu.edu Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 9

Corporate Financial Restructuring-5 Blackboard On-line Problem Sets Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 10 Average Impact of Restructuring on Company Performance 40.00% 30.

5 Corporate Financial Restructuring-5 Blackboard On-line Problem Sets Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 10 Average Impact of Restructuring on Company Performance 40.00% 30.00% 20.00% 10.00% 0.00% % Portfolio Financial Organiz. Source: Bowman et al, When Does Restructuring Improve Economic Performance? Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 11

6 Corporate Financial Restructuring-6 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 Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 12 Why Restructure? Some Reasons Address poor performance Exploit strategic opportunities Correct valuation errors Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 13

7 Corporate Financial Restructuring-7 How Restructure? Fix the business Fix the financing Fix the ownership/control Create or preserve value Negotiate distribution of the value Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 14 How Restructure? Some Obstacles There are market imperfections or institutional rigidities that make it difficult for the firm to recontract These include: Transaction costs Taxes Agency costs Information asymmetries Example: The restructuring of USX Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 15

8 Corporate Financial Restructuring-8 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 Improve capitalization Improve debt composition Change ownership and control Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 16 Novartis

9 Corporate Financial Restructuring-9 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 Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 18 Novartis

Corporate Financial Restructuring-10 Value-Based Management Sales Operating margin Notional taxes Net Working capital Net Fixed Capital Goodwill NOPAT* Invested

10 Corporate Financial Restructuring-10 Value-Based Management Sales Operating margin Notional taxes Net Working capital Net Fixed Capital Goodwill NOPAT* Invested Capital Cost of Capital Economic Profit *Net Operating Profit After Tax Source: Ciba Specialty Chemicals Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 20

11 Corporate Financial Restructuring-11 Novartis: Financial Restructuring Fixed the cash and working capital Assets Cash Liabilities Debt Fixed the capital structure Fixed Assets Equity Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 22 Financial Restructuring The increase in value that comes from a purely financial effect: Lower taxes Higher debt capacity Better use of idle cash Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 23

12 Corporate Financial Restructuring-12 Corporate Restructuring: It s All About Value How can corporate and financial restructuring create value? Assets Liabilities Fix the business Operating Cash Flows Debt Equity Or fix the financing Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 24 Restructuring Checklist Figure out what the business is worth now Fix the business mix divestitures Fix the business strategic partner or merger Fix the financing improve D/E structure Fix the kind of equity Fix the kind of debt or hybrid financing Fix management or control Use valuation model present value of free cash flows Value assets to be sold Value the merged firm with synergies Revalue firm under different leverage assumptions lowest WACC What can be done to make the equity more valuable to investors? What mix of debt is best suited to this business? Value the changes new control would produce Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 25

13 Corporate Financial Restructuring-13 Valuation is a Key to Unlock Value Value with and without restructuring Consider means and obstacles Who gets what? Minimum is liquidation value Valuation Going Concern After Restructuring Liquidation Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 26 Getting the Financing Right Step 1: The Proportion of Equity & Debt Debt Equity Achieve lowest weighted average cost of capital May also affect the business side Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 27

14 Corporate Financial Restructuring-14 Capital Structure: East vs West Nokia TPI VALUE OFTHE FIRM Optimal debt ratio? DEBT RATIO Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 28 See Saw Business Uncertainty Operating Leverage Financial Risk Financial Leverage Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 29

15 Corporate Financial Restructuring-15 Getting the Financing Right Step 2: The Kind of Equity & Debt Debt Equity Short Short term? term? Long Long term? term? Baht? Baht? Dollar? Dollar? Yen? Yen? Bonds? Bonds? Asset-backed? Asset-backed? Convertibles? Convertibles? Hybrids? Hybrids? Debt/Equity Debt/Equity Swaps? Swaps? Private? Private? Public? Public? Strategic Strategic partner? partner? Domestic? Domestic? ADRs? ADRs? Ownership Ownership & control? control? Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 30 Restructuring and Structured Finance: Examples 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 capital Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 31

16 Corporate Financial Restructuring-16 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?) Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 32 Case Studies Evaluate the financial restructuring taking place at: Getronics Dynegy Conseco Copyright 2003 Ian H. Giddy Corporate Financial Restructuring 33

Capital Structure Planning. Why Financial Restructuring?

Capital Structure Planning. Why Financial Restructuring? Giddy/SIM Capital Structure /1 SIM/NYU The Job of the CFO Capital Structure Planning Prof. Ian Giddy New York University Why Financial Restructuring? The Asian Bet The Solution, Part I: Recapitalization