Debt Restructuring and Recapitalization

Debt restructuring in simple terms is negotiating a company’s debt towards reducing, and in some cases almost eliminating, a company’s principal or interest owed on all or some of the debt instruments. It implies that through these negotiations the creditor will take a “haircut,” allowing the borrower to owe less money to the lender than before the negotiations started. Companies in distress often attempt to restructure its debt rather than file for bankruptcy. Debt restructuring takes the concept of debt refinancing to a whole new level of financial expertise; positive results for the borrower can only be attained by leveraging the distressed company’s situation against the devastating results that a court ordered bankruptcy can impose, especially on unsecured creditors. On the other hand, recapitalization is basically restructuring a company’s debt and equity mixture, usually involving the exchange of one form of financing for the other. Companies often recapitalize their debt-to-equity ratio to improve liquidity, avoid taxes, or otherwise improve the capital structure of a business for strategic purposes. However, both debt restructuring and recapitalization are tools to improve the capital structure of a business to either avoid future negative consequences from occurring or provide the mechanism to function in the future with less financial restrictions. In distressed turnaround situations NWX often utilizes both these tools during the same timeframe to achieve faster and more significant results.

Debt Restructuring

When a distressed company is faced with restructuring its debt it can be a very acceptable alternative to that of filling for court protection under Chapter 11. However since CSC Capital was founded we have believed that debt restructuring taken as stand-alone negotiating tool and financial solution is only addressing the symptoms of a financial debacle. This is where the firm parts company with many in our industry. Like moving the deck chairs around on the Titanic, debt restructuring will not solve a company’s true problems. Eventually new debt burdens will again surface forcing new and more creative evasive actions, similar to the current debt crisis of the U.S. federal government, and several European nations. The key difference is between managing a debt crisis and solving a debt crisis. We believe that unless a debt restructuring is incorporated with an overall top-to-bottom corporate restructuring program, debt restructuring like sovereign debt restructuring is nothing but a “band-aid,” kicking the “can down the road,” or otherwise a financial bridge that helps overcome the current crisis while merely postponing the eventual reality of not dealing honestly with the true corporate problems. Here too cutting corporate waste and the practice of budgeting are also fine stop-gap measures, but sadly wasteful activates will once again resume with the blessing of the budget masters.

NWX’s very aggressive debt restructuring program works hand-in-hand with CSC Capital’s Corporate Restructuring group in finally solving our client’s true debt problems for ever. It leverages the significant real long term benefits associated with positive organizational, financial, personnel, and accountability solutions with that of reducing the debt structure of the company. It has been our experience over the years that without an overall corporate restructuring program in place securing debt structuring arrangements are sometimes more difficult due to the fact that creditors see the immediate “hair cut” without the possibility of being part of a strategic solution that could involve them as long term beneficiaries. Innovative solutions such as creating a debt conversion vehicle into an equity position at a future date is often an attractive incentive for creditors to support a debt restructuring. Short of bulldogging the creditors into obedience through threats of bankruptcy, it has been the firm’s objective to try to make the restructured debt of the creditors into a strategic solution for them as well. Of course the determination as to which creditors are part of the long term strategy and which ones are not is made on a lender-by-lender analysis of future creditor needs.

In almost all turnaround situations debt restructuring is an essential aspect of the firm’s overall turnaround and restructuring program. Our reputation as tough and business savvy negotiators with our vast weaponry of expedient reorganization solutions provide debt restructuring clients with the utmost of our two decades of experience. We have negotiated and received acceptable debt reduction arrangements with federal and state revenue authorities, unsecured principal vendors and note holders, angel investors and venture capitalists, real estate landlords and commercial leasing companies, factoring and royalty financing firms, mezzanine holders of debt, and even secured asset-based lenders and senior secured banks, international, national and regional.

Recapitalization

Recapitalization is when debt and equity are being shifted within a company. It is also a wealth strategy for ultra-savvy business owners. Purposes vary but the traditional objective is to provide more benefit from future growth with less risk from ownership, thus the corporate shift is from less equity to more debt. Recapitalization is also normally the route taken to make a company’s capital structure more stable because of a likely fall in corporate value, again shifting owner’s equity to debt. If a hostile takeover is likely a recapitalization might execute the absorption of considerably more debt, issuing substantial dividends to shareholders thus making the takeover more risky. When initiated by the company itself for internal reasons this is called a leveraged recapitalization, when initiated by a outside party it is called a leveraged buyout. In both instances debt has some advantages over equity because of the tax benefits from raising money and in both circumstances it enforces a cash discipline with much tighter expense controls. However, whether initiated by the company or by an outside investment company, the initiators stand to reap substantial monetary benefits by shifting huge amounts of company equity to themselves thus increasing corporate debt accordingly. Of course, in either situation the additional debt burden makes the company particularly more vulnerable to unforeseen problems, both internally and economic. A simple analogy is driving down the road with a knife sticking out of the steering wheel. As long as the road is smooth all is well, but if a bump or a ditch comes along then the consequences could be sudden death. Investment companies who engage in leverage buyouts strategies is to hold onto the company’s stock for a few years, to ramp up the value, then sell; a internally initiated leverage recapitalization strategy is a bit more troublesome because of a conflicted exit strategy, though still easily accomplished through selling the company. Finally, distressed companies might undertake a recapitalization as part of their restructuring process.

NWX advises companies in recapitalization activities whether they are traditional in purpose toward making a company’s capital structure more stable in the event of lower stock values or in a leverage capitalization, which is likely to create excessive and perhaps unsustainable amounts of debt, unless expenses are drastically reduced and then maintained at the new low levels. However, in either case a NWX recapitalization strategy provides liquidity for owners to sell the majority of their business while allowing them to retain operational control. We also through our affiliated groups ensure that road traveled is free of bumps and ditches. If a company’s ownership is looking to realize liquidity without losing control, hire a professional management team and continue on as partial owner, maintain partial control but diversify holdings, a recapitalization might be the right option. But in all situations, the shift from corporate equity to debt means excessive more management and expenses controls, with an overall corporate discipline that is perhaps outside the culture of the pre-recapitalized company. This is where the full force of CSC Capital’s synergistic expertise in restructuring, turnaround interim management and strategy consulting is essential. Few financial advisory firms can supply the in-house financing and operational support to ownership that can take a successful recapitalization from idea to increased and diversified personal wealth.