Reestruccturacion Financiera

DF2-264-I
This document is authorized for use only by Jaime Meneses at Universidad Americana de Panama for educator review from 07-16-2021 to 08-16-2021
INTRODUCTION TO FINANCIAL RESTRUCTURING

Original written by professor Daniel Paredero del Bosque at IE Business School.
Original version, October 1, 2020.
Published by IE Business Publishing, María de Molina 13, 28006 – Madrid, Spain.
©2020 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.
INTRODUCTION
The concept of financial restructuring is not a widely spread and clearly defined concept. On too
many occasions, I have found that the term has been, and still is, erroneously used, not only by the
press but also by bankers and other professionals who play a role in the financial services industry.
This is the main reason why I find it especially helpful to first establish what financial restructuring is
not when trying to explain what financial restructuring involves, Although it shares some similarities
with other types of transactions such as operational restructuring or refinancing deals, financial
restructuring is definitively not the same as either of these two, despite general confusion over these
terms.
OPERATIONAL RESTRUCTURING VS. FINANCIAL RESTRUCTURING
Financial restructuring is not operational restructuring.
Operational restructuring involves identifying the causes of operational underperformance in a

company and designing and implementing an appropriate strategy and action plan to improve
operating results and cash flows. Operational restructuring does not have to do with the capital
structure of a company (i.e., the amount or structure of debt and equity) but rather with solving
inefficiencies which, in short, negatively affect EBITDA 1 or operational or investing cash flows.
Operational restructuring measures may include:
 Reviewing and closing down unprofitable products or business areas.

 Reviewing the company’s markets and decisions around expansion or internationalization of the
company’s business.
 Aligning the company’s cost base with its revenue base. Cost reduction or “rightsizing”
measures, including personnel lay-offs.
 Improving working capital, including stock management, collection/payment optimization.
 Closing or selling non-core activities.
 Strengthening the management team.
On the other hand, financial restructuring is intrinsically linked to the capital structure of a company.
In other words, dealing with a situation of excessive debt in such company. Financial restructuring
will directly impact financial costs, financing cash flows, and the capital structure of a company but
not the rest of the profit and loss or cash flow items, which will only be indirectly affected by financial
restructuring.
1
EBITDA: earnings before interest, taxes, depreciation, and amortization
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INTRODUCTION TO FINANCIAL RESTRUCTURING DF2-264-I
REFINANCING VS. FINANCIAL RESTRUCTURING
Financial restructuring is not debt refinancing.
THE CONCEPT OF DEBT REFINANCING

The term refinancing is even more frequently mixed up with the term financial restructuring, given
that both concepts share similarities and tools. In fact, many transactions of this type include a mix
of refinancing and restructuring aspects. In other words, there is not a clearly defined line between
both concepts in many cases.
A refinancing transaction could be defined as the regular action of obtaining new financing to replace
the existing one. It is important to note that in a refinancing deal, the amount of debt generally does
not change (while it does or should in financial restructuring). The reason behind this is that
refinancing is normally carried out by companies whose debt is sustainable or close to sustainable 2.
This new financing should be provided at standard market terms (in relation to leverage, loan
maturity, pricing, and other financing conditions).
REASONS WHY COMPANIES REFINANCE THEIR DEBT
There are three main reasons why a company may decide to refinance its debt:
 Improvement of terms: seeking lower interest rates, more comfortable amortization schedules,
or more flexibility regarding other contractual terms (such as financial or non-financial
covenants 3) of existing debt obligations. This type of refinancing is typically carried out by
companies that have improved their financial situation or feel that the financing market terms
have improved. These companies would like to take advantage of such particular or general
market improvement.
 Expected refinancing: in certain financing transactions, an asset may be financed with a tenor 4,
which is clearly shorter than the underlying repayment period of that specific loan. For example,
a seven-year loan granted for the construction of a toll road whose projected cash flows are
expected to repay the loan in full in no less than twenty years. In this case, the loan will need to
be refinanced by the end of year seven or before.
This type of financing is also known as mini-perm financing and is commonly used in the real estate
finance (REF) sector.
Example: an investor is willing to acquire an office building for €100m, contributing €25m in equity
and financing the rest of the price through a €75m acquisition facility, with a 4% annual interest
payment. After taking into account some buffers, it has been estimated that the office building will be
able to generate a net rental income (available to service debt) of €6m p.a. 5, growing annually with
inflation.
2
However, companies whose level of debt is not sustainable and, therefore, are in need of financial restructuring, occasionally
carry out refinancing deals, also known in these cases as extend and pretend transactions.
3
Financial and non-financial contractual undertakings
4
Maturity
5
Per annum
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Fig. 1 - Acquisition of office building – debt paydown

In this case, as shown in Fig. 1, the underlying repayment period 6 of the €75m facility would be in
the range of 15 years. If the debt provider is not willing to offer such a long tenor facility, it can provide
a mini-perm loan with shorter contractual maturity, leaving a balloon payment to be refinanced or
repaid at the end of the life of the loan. In this case, a seven-year mini-perm loan would result in a
€49m balloon payment, equal to 65% of the initial facility amount.
Fig. 2 - Acquisition of an office building – debt profile for a seven-year loan
80 72
69
70 65
62
60 57
53
50 49
€ million
40
30
20
10
0
1 2 3 4 5 6 7
Year
Debt outstanding profile
- Amortization or maturity wall. A third refinancing situation may occur when a company finds
difficulties in facing the amortization schedule of its debt facilities. This includes cases where the
company needs to transform its short-term debt into long-term debt, normally as a consequence
of an inappropriate financing strategy.
The amortization or maturity wall is probably the situation where the terms refinancing and financial
restructuring mostly get mixed up. In a refinancing transaction, the amount of debt broadly
remains untouched. Only the terms of such debt, like its maturity, amortization schedule,
covenants, or interest rates, change.
In principle, a refinancing deal should be structured at market conditions. For instance, if

corporate loans available for telecom industry players normally do not exceed an underlying tenor of
six years, the refinancing conditions for a telecom company should, in theory, not exceed such term.
However, there are often refinancing situations where it is not possible to meet market standards,
and, on the other hand, the situation of the borrower is not sufficiently deteriorated to carry out
6
It is important to distinguish between the underlying maturity of a loan and its contractual maturity. The underlying maturity
indicates the amount of time that is expected to elapse until the full repayment of a facility, given a specific cash flow
generation expectation of a borrower. Contractual and underlying maturities do not always coincide.
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financial restructuring. In these cases, lending banks may not have many available options and will
need to show a degree of flexibility.
Example: Telecom company A has an expected future cash flow in the range of €50m (represented
by the green line in Fig. 3), which is insufficient to fulfill its debt service obligations in the next four
years.
Fig. 3 - Amortization wall situation leading to refinancing
In this case, the current indebtedness of company A could be refinanced through a single loan with
an extended amortization profile, which fits better with the company’s cash flow generation profile.
Fig. 4 - Amortization profile after refinancing
Unfortunately, in this case, the new refinanced loan would have a maturity of about nine years, which,
therefore, would exceed financing market standards for the telecom industry, showing that the
company is somehow overleveraged.
In most similar situations, lending institutions would normally show enough flexibility to carry on with
a refinancing deal. We need to bear in mind that in this case, the lenders will not have many
alternative options available, given that:
 The facilities were lent in the past, probably based on more optimistic cash flow generation
expectations that have not been fulfilled. In other words, the lenders are already “stuck” with a
certain level of the borrower’s debt.
 The lenders will hardly find any other institution to replace them in their lending role, unless their
debt is sold at a discount, resulting in losses for the incumbent lender.
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 The situation of the borrower is not too deteriorated yet. If things go as expected, after three to
four years the company’s amount of debt would have been reduced to a level ready to be
refinanced by third-party lenders. In other words, it is not a financial restructuring situation yet
given that the gap between the market standard and the company’s actual situation in terms of
leverage is not too wide.
REFINANCING TOOLS – UPSIDE INSTRUMENTS
The fact that the debt providers have agreed to refinance the loan and have, therefore, facilitated a
new amortization structure for telecom company A, which better fits its cash flow profile, has probably
enhanced their probability of being repaid in full. However, this does not mean that the lenders are
fully satisfied with the situation. In fact, they are now in a worse situation compared to the moment
when they initially provided the loan:
 The company has failed to meet its initial cash flow generation expectations.
 During the last few months, the management team has probably been distracted by the
company’s financial difficulties and the recent negotiations with lenders.
 The company is probably now in a worse relative position vis-à-vis its competitors, as a result
of an extended period of cash difficulties, which may have affected the company’s marketing,
R&D or investment plans, employee morale, or even its relationship with major stakeholders,
such as clients and suppliers.
 The loan maturity exceeds market standards, implying a higher level of risk for the lenders (more
things can go wrong in a longer period of time), and, as a result, higher risk weighted assets
and a negative impact on capital ratios.
In order to compensate for this deteriorated position, banks would typically charge upfront fees
(refinancing fees, arranging fees, etc.) and/or increase the interest rate or margin of a loan. However,
in tight cash situations like the one suffered by our telecom company, it is probably not the best idea
to put an extra cost burden on the company’s shoulders.
Instead, other types of tools may be used to compensate the lenders for the extra risk incurred, and,
at the same time, preserve the company’s cash position at this critical moment.
In refinancing cases, upfront fees can be replaced by back-end fees, which may be even higher in
quantum but will only be charged by lenders if and when the debt is repaid or refinanced by third-
party lenders (i.e., if things finally go as expected and the company has been able to deleverage).
Another possibility is signing profit participation agreements 7, which are quite typical in asset
financing agreements. In exchange for refinancing a loan at a critical moment, a company agrees to
share a percentage of a potential capital gain on the future sale of the financed asset with lenders.
This type of profit-sharing agreement is even more commonly used in financial restructuring
situations.
7
Profit participation agreements (PPAs) are typically signed in combination with refinancing transactions in the Anglo-Saxon
real estate finance markets during the bottom of the cycle.
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FINANCIAL RESTRUCTURING AND SUCCESS FACTORS
THE CONCEPT OF FINANCIAL RESTRUCTURING
The term financial restructuring involves modifying a debtor’s capital structure so that its resulting
financial position and obligations:
- are adapted to the company’s expected cash flow generation profile and
- become refinanceable in the market (at least in the short- and medium-term)
In other words, when it comes to financial restructuring, companies will normally seek debt reduction
(i.e., deleveraging it) so that the debt remaining at such company becomes sustainable. This is the
main difference compared to a refinancing deal, where the amount of debt broadly remains
unchanged.
The parties involved in the negotiations will need to determine whether they are dealing with a
refinancing case or with a financial restructuring case, which will depend on the debtor’s level of
excess leverage. As a proxy, cases where the underlying repayment period of the existing debt
facilities exceeds the market maximum standards for the debtor’s industry by more than fifty to
seventy percent, start to get close to restructuring territory.
THE CONCEPT OF SUSTAINABLE DEBT
There are no magic ratios in relation to the amount of debt that should remain in a company after
financial restructuring. Every different sector—and even every different company within a specific
sector—will have a particular maximum debt capacity. Above this limit, the exceeding portion of debt
will be considered unsustainable. Moreover, this limit may vary from time to time at the same
company, depending on the dynamics of the sector and the ongoing evolution of the company’s
expected performance.
Fig. 5 - Financial restructuring – sustainable debt
Sustainable debt could be defined as the maximum level of debt that allows a company to operate
and compete at market terms. The concept of debt sustainability is closely linked to the concept of
cash flow generation. Debt is repaid with cash. Therefore, the ability of a given company to generate
positive cash flow in the future and the quantum of such cash flow will determine its amount of
sustainable debt.
In addition to cash flow generation, another factor that has an impact on sustainable debt quantum
is the predictability and stability of cash flow. The more predictable and stable cash flow is, the lower
the risk for the same level of debt, and, therefore, the higher the amount of debt a company can bear.
Finally, the higher the level of valuable and liquid assets in a company, especially non-operating
assets, the higher the debt a company can afford. Selling those assets may definitively contribute to
the paydown of debt if needed.
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The level of sustainable debt in a company should never exceed the enterprise value of such
company. This rule is a useful proxy when calculating the sustainable debt quantum.
RESTRUCTURING TOOLS: THE PROCESS OF DELEVERAGING

The deleveraging process in a company on the path towards financial sustainability can be carried
out in different ways:
 Equity injection: this is one of the first measures that comes to our minds when we think of re-
balancing the capital structure of a firm. In many cases, however, this deleveraging tool will not
be accessible for the company. In private businesses, for instance, a capital injection in a
financial restructuring situation will normally depend, among other factors, on the financial
capabilities of the company’s shareholders, their contractual position vis-à-vis the company’s
financial obligations (i.e., any existing shareholder guarantee in place) or even reputational
factors. The shareholders’ opinion in relation to the company’s business recovery expectations
will also be critical, together with the right development of negotiations between shareholders
and lenders and the accomplishment of a fair balance between shareholder effort and lender
effort in those negotiations. In other words, not many shareholders will be willing to contribute
funds to a bottomless well.
 Sale of assets: a second way to bring down the debt of a company is selling part of its assets.
The assets sold may include business units, non-core activities, or other operating or non-
operating assets. The most effective sale to reduce debt will normally be the disposal of non-
operating assets, as their disposal, in principle, will have a more limited impact on the company’s
future cash flow. Selling operating assets through sale and leaseback agreements is always a
possibility, although sometimes very costly for the company.
Selling assets will often be imposed by the lenders in refinancing situations through the
introduction of covenants (positive undertakings) that force the company to sell assets under
certain conditions over the life of the refinancing. These types of agreements represent a mix
between refinancing and a financial restructuring transaction, as the company’s debt is initially
refinanced with no change in quantum, but the agreement includes certain clauses that are
meant to accelerate the reduction of debt over the life of the loan.
 Debt-for-asset swaps: these are agreements between a company and a debt provider for the
acquisition, by the latter, of a specific company asset (normally real estate) in exchange for a
reduction of debt. Although not very commonly used, this tool may be effective when the market
for the assets that the company is willing to sell is not liquid enough or when selling those assets
is not advisable at a certain moment in time (for instance, selling a particular real estate asset
when the real estate cycle is bottoming). In this case, a win-win situation may be generated by
a debt-for-asset transaction. On the one hand, the debt provider acquires an asset at a price
that will probably generate a capital gain in the future when the market recovers. On the other
hand, the company benefits from selling an asset at a price not obtainable in the market at that
moment. In addition, both the company and lender benefit from the deleveraging process, which
will increase the probability of the company repaying the remainder of its debt.
 Debt-for-equity swaps: the transformation of part of the company’s debt into equity, by means
of a capital increase in favor of the debt holders of such company (also known as debt
capitalization), is one of the most powerful deleveraging tools that can be used when other
options are not available or in combination with other restructuring tools. However, these are
also the most difficult transactions to complete, given the complexities involved. It is worth noting
that these types of capitalizations may be implemented on day one (i.e., the conversion of debt
into equity takes place immediately when the parties sign the financial restructuring
documentation) or over the life of the restructured loans, through equity conversion options
(convertible debt).
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Later in this document, the advantages of carrying out this type of transaction, both for the
company and for the lenders, are explained together with the general principles that should
guide such financial restructurings.
Fig. 6 - Debt-for-equity swap

OTHER RESTRUCTURING TOOLS
As mentioned in the previous section on refinancing, in a situation of cash flow insufficiency that
leads to financial restructuring or a refinancing deal, it may be counterproductive to put an extra
burden on the company with upfront fees and/or increased interest rates or margins. In this sense,
the mentioned refinancing tools, such as back-end fees or profit-sharing agreements, also apply in
financial restructuring situations. Additionally, the company and lenders may make use of other
restructuring tools aimed at increasing financial flexibility for the company:
 Cash sweep and cash flow sweep: When a cash sweep clause is introduced in a financing
agreement, the company undertakes to use its excess cash at a pre-established date (i.e.,
December 31) for the paydown of its outstanding debt rather than using it for other purposes.
When combined with a soft debt amortization schedule, the cash sweep provides the
company with financial flexibility. When dealing with this tool, it is important to correctly define
what “excess cash” means, as this concept may be different for different companies, and it
is very related to the minimum operating cash required in a business to operate safely and
avoid cash shortages.
The cash flow sweep is a very similar tool, although, in this case, it refers to the mandatory
use of excess cash flow for the repayment of debt. Cash sweep and cash flow sweep are
terms that are often mixed up, despite the fact that they represent different concepts in the
same way that cash is not the same as cash flow.
 PIK/PIYC interest: If the cash or cash flow sweep provides flexibility to the borrower in the
paydown of debt, PIK and PIYC interest provide flexibility in the payment of interest.
PIK (or payment in kind) interest is interest that can be paid by a borrower in a deferred form
through the issuance of additional loans instead of making cash payments. This way, the
interest is not paid, but the company’s quantum of debt increases. In certain jurisdictions,
where the PIK element cannot be included in the accounting as a profit in the lender’s P&L,
this type of interest is normally replaced by a back-ended fee with similar economics in order
to avoid accounting complexities.
PIYC (pay if you can) interest provides further flexibility to the borrower, which will be able
to opt for payment in cash or PIK interest, depending on the company’s cash situation at
every interest payment date.
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THE ADVANTAGES OF FINANCIAL RESTRUCTURING
When facing a financial restructuring situation, and, in particular, the possibility of carrying out a debt-
for-equity swap, it is very important to identify the advantages of proceeding with this type of
solution. Such advantages are not obvious, and this may partly be why parties are sometimes
reluctant to carry out this type of transaction.
On the one hand, shareholders’ emotional ties to the company or unrealistic business recovery
expectations sometimes may act as blocking elements. On the other hand, lenders sometimes do
not fully understand the advantages that debt write-off will bring for their own interests. Sometimes
loan managers also have personal conflicts of interest when facing the fact that the borrower status
has changed and that the loan they took out in the past will probably end up causing a loss for their
institution. These are the main reasons why many international lending entities choose to have their
own specialized restructuring teams to deal with these situations.
These barriers to financial restructuring lessen the probabilities of a successful deleverage and often
lead to massive failures, insolvencies, and even company liquidations.
Other times, lenders do not feel ready to receive and manage an equity stake in a company and face
the inherent obligations attached to the ownership of such holding (management of the participation,
board membership, reputational aspects, etc.). These situations, which may initially represent a
barrier to a proper deleveraging of the company, are sometimes unblocked by a discount sale of the
lender’s debt to specialized debt or hedge funds. Once a sale takes place, financial restructuring is
facilitated, as the original lender assumes a loss (similar to a write-off of debt) through the sale of its
debt holding at a discount. Thanks to the discount obtained in the purchase, the acquiring fund will
enjoy a higher degree of flexibility to continue with the debt restructuring.
The advantages of deleveraging a company through debt capitalization can be summarized as

follows:
 Management focus: deleveraging the company will definitively increase management’s focus
on the business rather than keeping their mind on dealing with cash shortages, legal claims,
and negotiations with lenders.
 Operating flexibility: when the borrower’s indebtedness is reduced to sustainable levels, part
of the cash generated by the business will continue to go to paying off the remaining portion of
debt but the other part may be used for capital expenditure purposes, research, marketing, etc.
Now the company is operating at similar conditions to its peers, and it can take advantage of
market opportunities as they come.
 Image improvement: the company’s main stakeholders will certainly be informed about the
changes in its financial situation, and this may lead to positive impacts on operations and cash
flow. For instance, suppliers, which with the company’s previous delicate financial position
perhaps requested payments in cash before delivering their products, may now start to provide
some credit to the company, and this will have a positive effect on the cash flow of the business.
At the same time, clients, which may have reduced their business with the company in order to
limit the risk of delivery issues (interruptions, delays, etc.), may now resume operations as usual,
positively impacting the company’s business.
 Reduction of insolvency risk: the combination of reduced debt levels and the positive effects
mentioned above reduces the probabilities of insolvency and contributes to improving the
company’s financing conditions.
 Maximization and anticipation of recovery for lenders: up to this point, only the positive
effects that a deleveraging process may have on a borrower have been mentioned. However,
lenders may also benefit from this process through a triple effect:
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- On one hand, the probability of the remaining portion of the company’s debt being fully paid
off will significantly increase after financial restructuring.
- On the other hand, the value of the lender’s equity stake in the company will normally
progressively improve, as a result of the company’s ability to create value in the new
deleveraged scenario. The progressive repayment of debt will also contribute to such
increase in equity value. As a result, if things go relatively well, the value of those two
components, debt plus equity, will normally exceed the initial value of the pre-restructured
debt over time.
- In addition, lenders will improve the liquidity of their interest in the company, moving from a
relatively illiquid position represented by a non-performing loan, only sellable to debt or
hedge funds under certain circumstances, to more liquid debt and equity holdings.
Fig. 7 - Lenders’ position following a debt-for-equity swap
HOW TO DEAL WITH FINANCIAL RESTRUCTURING: THE EIGHT MAIN PRINCIPLES
The following list of principles is meant to guide those who get the chance to work in financial
restructuring, either on the company side or on the lender side.
1. Diagnosis: analyze and correctly diagnose the borrower’s situation. Is the company suffering
from liquidity constraints (temporary) or is it facing a solvency issue (more permanent)? In both
cases, the company will face difficulties fulfilling its debt obligations as they are due; however,
the way to tackle each situation is completely different.
2. Lead: do not wait for others to solve the situation. Not doing anything is not an option, as the
mere passage of time will just worsen things. When dealing with large companies in need of
restructuring, banks will normally organize themselves and form steering committees to design
a solution and negotiate with the company or its shareholders. With smaller companies,
lenders sometimes do not take the lead and the company will need to do so. This is not
necessarily negative, as leading the negotiations will give the company a first-mover
advantage and the ability to control the process.
3. Early timing (and patience to negotiate): given the complexities involved in these types of
deals, the restructuring process will need to be started as early as possible. The company will
be dealing with lenders, which are generally slow in their decision-making process. And the
company will usually not just be dealing with one lender, but probably with a group of them,
with different positions, interests, and views about the solution to be adopted. All of this,
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combined with potentially complex structures to be implemented and hard decisions to be

taken, makes restructuring processes take very long, generally no less than six months.
In this type of context, the negotiating teams should be ready to make concessions and show
flexibility and be able to create innovative solutions to accommodate the interests and
sensitivities of everyone involved.
4. Borrower homework: before being ready to take the hit that a restructuring process
represents, lenders will normally request a proportional effort from the borrower in the form of
operational restructuring. If the borrower anticipates this request and starts its own
restructuring homework first, negotiations with debt providers will probably run more smoothly.
The company will also need to ensure its own financial and legal stability for the lengthy
negotiation period that lies ahead. It may need, for instance, to sell assets in order to preserve
cash and continue to fulfill its operational obligations during the process. It may also need to
sign standstill agreements with the vast majority of its lenders aimed at temporarily reducing
its financial obligations and avoiding any insolvency filing requests, acceleration of debt, or
security enforcement by the lenders. These agreements are very useful for creating a stable
negotiation framework between the parties. On its side, the company will normally reciprocally
not file for insolvency, make any debt repayment, or sell any asset until negotiations are over.
5. Transparent and equal treatment of lenders: one of the main pillars of the lending business
is trust. In restructuring situations, trust acquires an even more important role, so the borrower
should be doing anything in its hands to maintain trust or even build it. Acting transparently at
all times and treating all of its lenders equally is crucial for showing that no lender is being
mistreated in favor of others. If there is a misperception, the restructuring process could fall
apart like a house of cards. It is important to clarify that treating lenders equally does not mean
negotiating the same solution for everyone, given that lenders may have different starting
positions in terms of security coverage and contractual seniority, which will need to be taken
into account in the negotiations.
6. Sustainable debt concept: when restructuring the debt of a company, always keep in mind
the sustainable debt concept. This is the level of debt that should remain in the company after
restructuring. Given that debt is repaid with cash, the main factor to establish a proper level of
sustainable debt in a company will be its expected cash flow generation in the future. Available
assets for sale will need to be taken into account in those expected cash flows. Cash flow
stability and visibility are also very important factors to consider, which will largely depend on
the sector where the borrower operates, but also on the characteristics of the company. The
higher the expected stability of cash flows, the higher the debt a company can bear with the
same level of expected cash flow.
Make use of projection models and sensitivities to calculate the borrower’s sustainable debt.
Combine this analysis with the use of industry or peer comparables.
7. Debt slicing concept: Create different tranches of debt to better adapt the future financial
obligations of the company to its expected cash flow generation profile. For instance, if the
company has assets or business units that may be sold in the future but the date of sale is
uncertain, a special tranche of debt can be created to accommodate such eventual sale 8.
8
Apart from the sale of assets or business units, this type of special tranche may also be created in cases where there is a
prospect of future equity issuance. It can also take the form of a convertible debt tranche.
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Thus, debt could be structured with two tranches:
a) a first tranche (tranche A) with an amortization profile reflecting the recurring cash flow of
the company, and
b) a second tranche (tranche B) to accommodate the potential sale of the assets or business
units. Given the uncertainty surrounding the sale, this second tranche should provide
enough flexibility in terms of:
- principal amount (providing a cushion in relation to the theoretical value of the assets),
- tenor (long enough to cover potential delays in the sale process),
- amortization profile (preferably bullet, with a repayment obligation of the net sale
proceeds obtained in each sale), and
- interest obligations (preferably PIK interest, whether in the form of capitalized interest
or back-ended fees, so that the recurring cash flow of the company is not affected). The
interest charged may progressively increase to incentivize a speedy sale process.
Fig. 8 - Debt slicing example
8. Alignment of interests
Interests between the debt holders and the shareholders and management of the borrower should
always have a degree of alignment, especially in cases where the debt holders do not intend to
take a hands-on approach to managing a company following restructuring.
If the financial restructuring, for example, incorporates a deleveraging plan through the sale of
certain assets of the company, a proper incentive scheme should be implemented to ensure that
debt holders are not the only party benefitting from the sale, and, thus, facilitate the success of the
plan. Such scheme could include success fees for management or the company shareholders,
linked to the sale of the assets, the price obtained, and the timing of the process, or the possibility
of retaining part of the sale proceeds in the company to be used for other corporate purposes.
In restructuring transactions involving a debt-for-equity swap, the equity stake to be obtained by

the lenders in exchange for the write-off of their debt should also consider the need of maintaining
a proper equilibrium between the interests of debt holders and shareholders. Many times, the
overleverage of a company in need of financial restructuring is so high that the value of the equity
(pre-restructuring) will be zero or close to zero. This would theoretically mean that any conversion
of debt into equity would result in lenders obtaining one hundred percent or nearly one hundred
percent of the company’s equity. However, if debt holders are not ready to fully take the control of
the borrower and still rely on the company’s shareholders for whatever reason, the percentage of
equity to be received by the lenders should be lower to keep existing shareholders’ motivation up.
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Note: EV = Enterprise Value

INTRODUCTION TO FINANCIAL RESTRUCTURING
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Fig. 9 - Alignment of interests
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APPENDIX: A FINANCIAL RESTRUCTURING CASE
COMPANY HISTORY
Viandréele S.A. was founded in 1965 by Germain Latour. The company initially focused on producing
and selling high-quality sausages in the southern area of France. In 2001, Mr. Latour died and the
business fell into the hands of his forty-five-year-old son, Philippe, who had been working with his
father since the age of eighteen. Soon after taking charge of managing Viandréele, Philippe
commenced the geographical expansion of the business, first in the north of France and later
internationally. In 2003, the company started operations in Germany, and then expanded to Italy and
Spain in 2004. In 2007, Viandréele was already ranked number two in the French sausage market,
number three in Spain and Italy, and number seven in Germany. Its market share and ranking
remained stable during the following years until Philippe died suddenly in 2014. He was replaced by
his firstborn son, Jean Pierre, who had been working at Viandréele for the previous five years.
PRODUCT EXPANSION AND NEW PRODUCTION FACILITIES
Jean Pierre was twenty-nine years old when his father died. He had completed a degree in business
administration at a prestigious French university and joined his family business when he finished his
studies. Since then, he had been working in the finance area of the company, where he had had the
opportunity to build a good relationship with different banks. In 2013, Jean Pierre successfully
negotiated the first loan in the history of Viandréele, a €1.5m facility to finance a new production line.
Jean Pierre thought that Viandréele could benefit from its good reputation in the market and solid
commercial network to expand its product range, anticipating a good potential in products such as
ham and mortadella. In order to accomplish the business’ product expansion, he decided to acquire
a new production facility close to the company’s old premises in 2015. Jean Pierre signed two
different loans to finance the investment, an €11m amortizing seventeen-year loan for the acquisition
of the new facility, and a €5.5m amortizing seven-year loan for the refurbishment works needed and
the acquisition of new sausage, cooked ham, and mortadella production lines. The old sausage
production machinery was sold, and the old facility was left empty and rented to a third party as a
warehouse.
Fig. 10 - Viandréele’s Business Plan 2015E-2019E
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By the end of 2017, however, Jean Pierre noticed that the new areas of expansion were not
performing as expected. The production manager was consequently dismissed and replaced with
another production director coming from a competing firm. However, the intense competition in the
ham and mortadella markets, especially in Spain and Italy, did not help, and in 2018, the new
business incurred losses, which were only offset by the more profitable sausage area.
THE NEED FOR RESTRUCTURING
In early 2019, Viandréele had to request a new credit facility for one million euros to avoid a financial
payment default on its two main debt facilities. The financing request was approved by the
relationship banks under the condition an evaluation process would be opened aimed at potentially
restructuring the capital of the company. In the meantime, by mid-2019, Jean Pierre decided to focus
the company on its sausage operations. He closed down the ham and mortadella international
business and just left a small production dedicated to the French market.
Fig. 11 - Viandréele’s P&L account 2015-2019 (real)
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Fig. 12 - Viandréele’s cash flow statement 2015-2019

Fig. 13 - Viandréele’s Balance Sheet 2015-2019
THE FINANCIAL RESTRUCTURING AGREEMENT
Following the bank’s review process and a period of intense negotiations with Viandréele, an
agreement was reached to implement the following financial restructuring solution:
- Creation of three tranches of debt:

Liquidity facility (Tranche L):
o Purpose: new financing line to fund the execution of a personnel redundancy plan
(already initiated in 2019) and to ensure a minimum starting cash balance
o Tranche L amount: €1m
o Interest rate: EUR + 3.25%
o Amortizing, six-year facility
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o Upfront fee: 1,5%
Sustainable debt facility (Tranche A):
o Purpose: Restructuring existing debt.

o The amount of this tranche is based on a full repayment of Tranches L and A in six
years under the base case assumptions.

O Tranche A amount: €5m
o Interest rate: EUR + 3.25%
o Amortizing, six-year facility
o Back-ended fee: 3.5%, payable at full repayment or refinancing of Tranche A
Special facility (Tranche B):
o Purpose: Restructuring existing debt.

o This tranche is linked to the future sale of certain company assets, such as the old
production site (with rental income of €105k in 2019) and spare machinery following
the close down of the ham and mortadella international operations
o Asset estimated market value: €2.25m
o Tranche B amount: €2m
o Interest rate: EUR + 2.25% (cash interest) + 3% PIYC interest (increasing 1% p.a.
to incentivize the sale of the assets)
o Bullet, four years. Sale proceeds to be mandatorily used in the prepayment of
Tranche B, following each asset sale
- Debt write-off: Existing debt in excess of the sum of Tranches A and B will be written off by the
lenders in exchange for a 40% stake in the company’s equity
- Other terms:
 Commitment by the company to continue the process (started in 2019) of adapting its fixed
cost base to the new situation (i.e., continuing to implement a production personnel
redundancy plan and general and administrative cost reduction plan).
 Commitment to definitively close the remaining ham and mortadella operations in France if
the area continues to show disappointing results.
FINANCIAL PROJECTIONS
The restructuring terms were based on the company’s following business plan (base case):
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Fig. 14 - Viandréele’s projected P&L account 2020-2026E

The P&L projections reflect:
 The partial close down of the ham and mortadella operations, which from 2020 onwards
would be restricted to France and would only account for 7% of the company’s revenues.
 A progressive increase of Viandréele’s gross margin to levels in line with those obtained in
2015, before the product expansion took place.
 A personnel cost reduction to €640k (from €820k in 2018). Related redundancy costs of
€500k under extraordinary expenses in the accounting.
 A further reduction in general and administrative expenses, reaching a low of €620k in 2021
(compared to €730k in 2018).
Fig. 15 - Viandréele’s Balance Sheet 2020-2026E
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The “initial” balance sheet incorporates the debt restructuring measures on the company’s balance
sheet as of December 2019:
- The debt amount (L/T+S/T) now amounts to €8m, split as follows:
 Tranche A and B: €7m, entailing a €5m debt write-off from the previous €11.97m debt
position as of December 2019.
 Tranche L (liquidity line): €1m, which allows the company to start the restructuring period
with €1.51m in cash, continue to implement the personnel redundancy plan (€0.5m cost),
and maintain a minimum operating cash balance (€0.6m) during the projection period.
Fig. 16 - Viandréele’s cash flow statement 2020-2026E
The company’s estimated cash flow statement for the period 2020-2026E shows that with the new
debt structure, the company would be able to repay its debt in full by 2025E (six years) and, at the
same time, maintain a minimum operating cash level of €0.6m.
The projections assume that the asset disposals linked to Tranche B would take place in mid-2022
(year three).
THE OUTCOME OF VIANDRÉELE’S FINANCIAL RESTRUCTURING
Following the release of Viandréele’s 2023 results, the lenders decided to test the market and try to
sell their equity stake in the company. Viandréele had slightly outperformed its initial business plan
and ended 2023 with an EBITDA of €1.75m. In addition, it sold the old site and spare machinery at
a better price than expected (€2,60m), so net debt at the end of 2023 amounted to €500k, which
compared favorably to the base case’s net debt projection of €1.39m.
Following an organized sale contest including both financial and industrial investors, a private equity
firm was selected to acquire Viandréele. Its final offer for the entire company set Viandréele’s
enterprise value (EV) at €12.7m or 7.25x EBITDA 2023, which resulted in an equity value of €12.2m
after deducting the company’s net debt. The transaction would facilitate the full exit for the lenders;
however, it was agreed upon that existing family shareholders would reinvest part of the sale
proceeds in the acquiring vehicle so that the final ownership of the company would be shared
between the private equity firm (75%) and the founding family (25%). The acquisition would be partly
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financed by two specialized acquisition financing institutions, which would lend €7.0m for the
transaction.
Fig. 17 - Sale of Viandréele in 2024

As a result of the transaction, lenders received a payment of €4.9m for their equity stake and €0.2m
in the form of Tranche A back-ended fees, compensating their initial debt write-off of €5m in full.
Fig. 18 - Sources & Uses of Viandréele’s Buyout
■■■
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Reestruccturacion Financiera

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DF2-264-I

INTRODUCTION TO FINANCIAL RESTRUCTURING

OPERATIONAL RESTRUCTURING VS. FINANCIAL RESTRUCTURING

Financial restructuring is not operational restructuring.

Operational restructuring involves identifying the causes of operational underperformance in a

 Reviewing and closing down unprofitable products or business areas.

REFINANCING VS. FINANCIAL RESTRUCTURING

Financial restructuring is not debt refinancing.

THE CONCEPT OF DEBT REFINANCING

REASONS WHY COMPANIES REFINANCE THEIR DEBT

Fig. 1 - Acquisition of office building – debt paydown

Fig. 2 - Acquisition of an office building – debt profile for a seven-year loan

Debt outstanding profile

In principle, a refinancing deal should be structured at market conditions. For instance, if

Fig. 3 - Amortization wall situation leading to refinancing

Fig. 4 - Amortization profile after refinancing

REFINANCING TOOLS – UPSIDE INSTRUMENTS

FINANCIAL RESTRUCTURING AND SUCCESS FACTORS

THE CONCEPT OF FINANCIAL RESTRUCTURING

THE CONCEPT OF SUSTAINABLE DEBT

Fig. 5 - Financial restructuring – sustainable debt

RESTRUCTURING TOOLS: THE PROCESS OF DELEVERAGING

Fig. 6 - Debt-for-equity swap

OTHER RESTRUCTURING TOOLS

THE ADVANTAGES OF FINANCIAL RESTRUCTURING

The advantages of deleveraging a company through debt capitalization can be summarized as

Fig. 7 - Lenders’ position following a debt-for-equity swap

HOW TO DEAL WITH FINANCIAL RESTRUCTURING: THE EIGHT MAIN PRINCIPLES

combined with potentially complex structures to be implemented and hard decisions to be

Thus, debt could be structured with two tranches:

Fig. 8 - Debt slicing example

In restructuring transactions involving a debt-for-equity swap, the equity stake to be obtained by

Note: EV = Enterprise Value

APPENDIX: A FINANCIAL RESTRUCTURING CASE

PRODUCT EXPANSION AND NEW PRODUCTION FACILITIES

Fig. 10 - Viandréele’s Business Plan 2015E-2019E

THE NEED FOR RESTRUCTURING

Fig. 11 - Viandréele’s P&L account 2015-2019 (real)

Fig. 12 - Viandréele’s cash flow statement 2015-2019

Fig. 13 - Viandréele’s Balance Sheet 2015-2019

THE FINANCIAL RESTRUCTURING AGREEMENT

- Creation of three tranches of debt:

o Upfront fee: 1,5%

Sustainable debt facility (Tranche A):

o Purpose: Restructuring existing debt.

years under the base case assumptions.

Special facility (Tranche B):

o Purpose: Restructuring existing debt.

Fig. 14 - Viandréele’s projected P&L account 2020-2026E

The P&L projections reflect:

Fig. 15 - Viandréele’s Balance Sheet 2020-2026E

- The debt amount (L/T+S/T) now amounts to €8m, split as follows:

position as of December 2019.

Fig. 16 - Viandréele’s cash flow statement 2020-2026E

THE OUTCOME OF VIANDRÉELE’S FINANCIAL RESTRUCTURING

Fig. 17 - Sale of Viandréele in 2024

Fig. 18 - Sources & Uses of Viandréele’s Buyout

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