Restructuring investment banking is a niche area of banking that is widely known but seldom understood in entirety. The common understanding about this component of financial services is that it deals with companies facing financial stress or distress.
Information about restructuring investment banking is limited, creating misconceptions. This brief post examines the definition of restructuring investment banking, clears some misconceptions and looks at restructuring solutions for investment banks and other aspects.
What Is Restructuring Investment Banking?
Many laypeople think that restructuring investment banking only deals with companies that have gone down under. In reality, this branch of banking attempts to salvage companies and even help them thrive through the right strategies.
Solutions proposed by restructuring investment bankers (RIBs) are aimed at reaching an agreement between a debtor (company) and its creditors (debtholders). In other terms, restructuring investment banking is a process wherein a debtor’s bankers develop a solution to restructure the debtor’s capital to turn things around.
Status of companies in restructuring investment banking
Companies that qualify for restructuring may fall under the following categories:
- Stressed: The company can pay interest on debt, but finds it difficult to pay for an upcoming maturity (debt principal).
- Distressed: The company has defaulted on maturity, interest or principal payment and has probably violated a financial covenant.
- Bankrupt: The company is now under liquidation and is interested in the best possible outcome for recovering losses.
The term ‘company’ can sometimes be replaced by ‘government’, as a restructuring group may be deployed to advise a government undergoing a financial crisis.
Stage at which restructuring investment banking is necessary
A brief look at the different stages of a restructuring investment banking process would help gain a better understanding of the process. So, at what stage does a restructuring group step in?
A commonly misconception lingers that a restructuring group enters the scenario at the bankruptcy filing stage. Although it is involved at this stage, it comes to the rescue earlier and may be able to prevent a company from filing bankruptcy.
The job of RIBs is to flag companies that seem to be inching towards the distressed stage. They approach such companies in a bid to offer solutions to turn around their balance sheet before it is too late.
Another myth is that a restructuring investment banker would be concerned about the equity trading levels of a company. A poorly traded stock can result in delisting, which is a matter of concern.
However, the focus is more on capital structure in the restructuring process, which has no ties with equity.
Finally, people often assume that although restructuring investment banks receive a mandate from a creditor, the focus is more on debtor-side mandates. This is incorrect. In reality, a restructuring investment group would prefer to align itself with the creditor-side mandate.
Investment banking organisations often employ third-party consultants for analytics and business intelligence.
RIBs play a critical role in the economy
Part of an investment bank, a financial restructuring group plays a critical role in advising debtors and creditors on capital structure issues and restructuring. Overleveraged companies that fail to meet liquidity obligations can benefit from the capital restructuring solutions offered by such groups.
RIBs are product experts aware of the dynamics and technicalities required to satisfy the needs of all parties concerned. Stressed or distressed companies can reach out to these organisations for remedies.
Since the COVID-19 pandemic raised its ugly head in 2019-2020, this niche group of investment bankers has risen to the occasion in more ways than one.
Restructuring solutions for investment banks is highly technical. There is a tendency to compare it to traditional mergers and acquisitions (M&A), but it is much more than that.
RIBs use a toolkit predicated on strong credit analysis, precision assumptions and deep understanding of financial capital markets, supplemented by thorough knowledge of legal documents. This is coupled with adequate experience in various scenarios and the subsequent negotiations involved. RIBs can contribute richly to financial solutions against the backdrop of a struggling global economy.