Valuing a company that is undergoing debt restructuring can be challenging. Debt restructuring is when a company attempts to renegotiate its debts with creditors in order to make the debt more manageable. This usually happens when a company is struggling financially and at risk of defaulting on its debt obligations.
The first step is to thoroughly analyze the company’s financial statements to understand what led it to the point of needing to restructure its debt. Look at trends over the past several years for key metrics like revenue, profit margins, cash flow, and debt levels. This will give insight into the company’s overall financial health and viability of its business model.
Some key questions to ask:
Next, review the details of the proposed debt restructuring plan. This will spell out the changes to debt agreements the company is seeking from lenders and bondholders.
Typical elements of a restructuring include:
Assess the likelihood of the plan being accepted as proposed based on incentives for creditors. Also consider worst case scenarios like Chapter 11 bankruptcy if the restructuring fails.
With an understanding of the financial history and proposed restructuring, develop projections for future cash flows over the next 5+ years. This is key for valuation.
Build projections starting from recent financial figures and layering on assumptions about:
Be conservative in projections given past financial difficulties. Run various scenarios to sensitivity test key drivers.
Common valuation methods include:
DCF is typically the preferred approach since it directly uses projected future cash flows. Pick an appropriate discount rate higher than normal to reflect financial distress risk.
Additional considerations when valuing a financially troubled company:
After making adjustments, the valuation likely implies substantial losses for current shareholders if company previously had a high market value. This reflects new reality after financial problems surfaced.
Critical assumptions that can make or break the valuation of a distressed company:
Sensitivities around these drivers should be explored in scenario analysis.
In summary, valuing companies in the midst of debt restructuring requires digging into financials, projecting performance given proposed changes to debt obligations, and heavily risk-adjusting traditional valuation methods. Keep focus on the cash flows available for debt service and equity shareholders in the years ahead.
For more on valuing distressed companies, check out these additional materials:
I hope this gives a helpful framework for thinking through how to value companies that have entered financial distress and debt restructuring. Let me know if any questions!
Please fill out the form below to receive a free consultation, we will respond to
your inquiry within 24-hours guaranteed.