Structured Finance Restructuring Prof Ian Giddy New York

Structured Finance: Restructuring Prof. Ian Giddy New York University

Structured Finance Corporate financial restructuring l Structured financing techniques l Asset-backed securitization l Copyright © 2002 Ian H. Giddy Structured Finance 2

What is Corporate Restructuring? Any substantial change in a company’s financial structure, or ownership or control, or business portfolio. l Designed to increase the value of the firm Restructuring l Improve capitalization Copyright © 2002 Ian H. Giddy Improve debt composition Change ownership and control Structured Finance 3

Novartis

Operating Restructuring The increase in value that comes from the operating side: l Better operating margins (usually economies of scale ie lower costs) l or l Future increased sales/profits from higher growth Copyright © 2002 Ian H. Giddy Structured Finance 5

Novartis

Value-Based Management Sales Operating margin NOPAT* Notional taxes Net Working capital Net Fixed Capital Goodwill *Net Operating Profit After Tax Copyright © 2002 Ian H. Giddy Economic Profit Invested Capital Cost of Capital Source: Ciba Specialty Chemicals Structured Finance 7

Novartis: Financial Restructuring Fixed the cash and working capital Copyright © 2002 Ian H. Giddy Assets Liabilities Cash Debt Fixed Assets Equity Fixed the capital structure Structured Finance 9

Financial Restructuring The increase in value that comes from a purely financial effect: l Lower taxes l Higher debt capacity l Better use of idle cash Copyright © 2002 Ian H. Giddy Structured Finance 10

Corporate Restructuring: It’s All About Value l How can corporate and financial restructuring create value? Assets Fix the business Copyright © 2002 Ian H. Giddy Operating Cash Flows Liabilities Debt Or fix the financing Equity Structured Finance 11

Restructuring Checklist Figure out what the business is worth now Use valuation model – present value of free cash flows Fix the business mix – divestitures Value assets to be sold Fix the business – strategic partner or merger Value the merged firm with synergies Fix the financing – improve D/E structure Revalue firm under different leverage assumptions – lowest WACC Fix the kind of equity What can be done to make the equity more valuable to investors? Fix the kind of debt or hybrid financing What mix of debt is best suited to this business? Fix management or control Value the changes new control would produce Copyright © 2002 Ian H. Giddy Structured Finance 12

Getting the Financing Right Step 1: The Proportion of Equity & Debt n Equity Copyright © 2002 Ian H. Giddy Achieve lowest weighted average cost of capital May also affect the business side Structured Finance 13

Capital Structure: East vs West Nokia VALUE OFTHE FIRM TPI Optimal debt ratio? DEBT RATIO Copyright © 2002 Ian H. Giddy Structured Finance 14

See Saw Business Uncertainty Operating Leverage Financial Risk Financial Leverage Copyright © 2002 Ian H. Giddy Structured Finance 15

Getting the Financing Right Step 2: The Kind of Equity & Debt n n Equity Bonds? Asset-backed? Convertibles? Hybrids? n Debt/Equity Swaps? Private? Public? Strategic partner? Domestic? ADRs? n Ownership & control? n n n Copyright © 2002 Ian H. Giddy Short term? Long term? Baht? Dollar? Yen? Structured Finance 16

Restructuring and Structured Finance Restructuring debt to make it cash-flow responsive l Converting debt into equity l Securing asset-backed funding l Securing mezzanine and subordinated debt financing l Securing equity-linked and hybrid financing l Raising new equity l Copyright © 2002 Ian H. Giddy Structured Finance 17

Case Studies Evaluate the financial restructuring taking place at: l Conseco l Getronics l Dynegy Copyright © 2002 Ian H. Giddy Structured Finance 18

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