How to Prepare for Restructuring Interviews?
The following Restructuring Interview Guide covers the RX investment banking recruiting process and the common technical questions and answers to prepare for.
Gradually, restructuring has more and more so become a sought-after career path. The novelty of the transactions and modeling-intensive work can be appealing, especially since coming from an RX background can lead to lucrative exit opportunities such as distressed hedge funds and buyout firms.
Restructuring Interview Guide: Questions and Answers
Traditional M&A, on the flip side, tends to see deal flow spike during times of economic growth and then wane during downturns as corporate cash balances decrease and access to the capital markets becomes restricted.
For that reason, certain EBs have their M&A and RX practices consolidated in certain locations and RX deal teams tend to be leaner, as decreases in M&A deal volume can be partially offset by increases in RX advisory mandates (and vice versa).
Without further ado, let’s get started.
Best Restructuring Investment Banks – RX League Tables
Elite boutiques (EBs) tend to have the upper hand on bulge brackets (BBs) when it comes to securing mandates in RX. In the global RX league table shown below, the absence of many BBs is quite noticeable:
2020 RX League Tables (Source: Refinitiv)
Bulge Brackets (BBs) vs. Elite Boutiques (EBs)
For M&A advisory, one distinction of bulge brackets is that each bank “has its own balance sheet”, meaning these banks run established divisions in capital markets, corporate lending, and credit.
Corporate lending divisions can afford to function as “loss leaders” by providing loans with terms favorable to the borrower specifically to foster better relationships with potential clients.
For BBs, the capital markets and lending divisions are a critical part of their business model – as these divisions can be leveraged to be selected for M&A mandates.
|Examples of Bulge Brackets (BBs)||Examples of Elite Boutiques (EBs)|
In contrast, elite boutiques do not have “their own balance sheet” and instead offer more pure-play, specialized advisory services. Using this to their advantage, when it comes to pitching their RX advisory services, a key selling point of elite boutiques is being an “independent advisor,” emphasizing the quality of offering unconflicted advice on behalf of the best interests of their clients.
Even the slightest perceived doubt in their advisor’s priorities could cause one bank to be chosen over another, especially given the high stakes of their decisions.
The aforementioned concern is an important determinant of choosing one bank over another to take on the mandate, and thus, the leading banks within the RX space consist mostly of elite boutiques due to their greater perceived impartiality.
Examples of Elite Boutiques (EBs) in Restructuring
Restructuring Advisory Transactions
RX Transaction Considerations
- First, the context of the engagement is entirely different because the client is in financial distress. The hiring is due to non-discretionary external factors.
- Next, the type of diligence completed is impacted by the distress, which leads to more Legal Complexities in each deal and a downward bias when performing valuation-related work.
- In addition, there are more relationships with stakeholders to manage, not just with the client. For example, a lot of time is spent negotiating with External Stakeholders.
- Lastly, the impact of the advisory is arguably greater in restructuring since the circumstances of the client are higher stakes – the recommendations made to the client can truly affect the trajectory of the company and/or a reorganization.
RX Mandate Pitching
In RX, being selected for a mandate is more reliant on the creativity of the solution presented and the extent to which the pitch resonated with the management team.
On the topic of pitches, the total number of pitches made in RX is fewer, but the pitches tend to be less generic and require more time to be spent on each.
To win a mandate, the pitch and creativity of the solution presented become arguably the main determinants – thus, each pitch deck requires more senior-level attention and direction.
Clearly, the track record of the firm in terms of deal flow, branding, and available resources still matter, but they take a back seat compared to the impression left by the MD in the bake-off.
When it comes to M&A advisory, the outcome is often predicated on the pre-existing relationships between the client and the senior banker(s) at the firm. In part, mandates are won by telling the client what they want to hear (e.g., higher valuation, extensive network with institutional investors).
But in RX, there are rarely pre-existing relationships – meaning, there are fewer preconceived notions as to which bank to hire for restructuring mandates.
Restructuring Investment Banking: Career Path
For the most part, the organizational structure found in restructuring varies little from the typical career path seen in other investment banking product and industry groups.
In general, RX analysts spend most of their day working on:
- Pitch Decks in PowerPoint and Light Modeling Work for Pitches (Under Guidance of Associate)
- Updating Existing Models for Live Deals or Recording New Documentation from Debtor, Client(s), or Court
- Screening for Potential Clients and Updating Capitalization Tables (i.e., Credit Analysis)
- Scheduling Conference Calls with Potential or Engaged Clients on Behalf of Senior Bankers
Considering the internal process within RX practices are not as developed as other areas in IB, the day-to-day work tends to be less structured, which can make the typical working hours in the range of 70 to 90 hours per week more grueling (i.e., unpredictability adds to the stress).
The longer working hours, however, is more tied to the type of banks involved in RX. Given how the majority of the leading restructuring practices belong to EBs, which often have overarching reputations for being “sweatshops,” it should come as no surprise the hours are tough.
Once an analyst is promoted to the associate role in M&A, an associate’s responsibilities tend to shift towards overseeing the new analysts they are put in charge of (e.g., reviewing the work of analysts to ensure quality standards are met, being the middleman for communication).
However, RX associates remain very active and their continuous workflow is actually comparable to the amount of work completed as an analyst – despite having to do fewer menial tasks. In RX, the analyst and associate relationships are more collaborative, as presentation decks, client deliverables, and models require significant contributions from both.
The associate handles the more complex modeling work and the granular industry or company-specific research, in addition to having a more active role in live deal support.
Simply put, the associate is responsible for tasks that inexperienced analysts cannot handle by themselves. From an efficiency standpoint, it is can oftentimes be better for the associate to do it themselves – as it takes time for the analyst to “catch up” due to their initial lack of experience.
Restructuring Vice Presidents (VPs)
In RX, vice presidents retain a supporting role for the MDs. While VPs do engage with currently engaged clients and attend pitches, they do not actively bring in clients for the firm.
The number of duties will depend on the firm, but broadly, the VP’s role actually resembles the role of a senior M&A associate more than a VP in M&A.
The VP is responsible for managing the workflow within the firm, reviewing the completed work by analysts and associates, and serving as the direct point-of-contact for the MDs.
Restructuring Managing Directors (MDs)
Managing directors (MDs) in RX, as in M&A, hold the responsibility of generating deal flow. This applies to M&A as well, but at elite boutiques, the individual MDs are truly the determining factor of the success (or failure) of boutique firms.
The central role of an MD is to pitch creative restructuring solutions in front of potential clients – and if chosen, the RX firm has successfully been retained for the mandate.
MDs subsequently communicate down the type of solution to propose for the client, which is directly discussed with VPs and then flows down to the associates and analysts.
Besides pitching potential clients, RX MDs at EBs require a network of potential lenders and equity investors – relationships often originating from the senior banker’s tenure at a BB.
Restructuring Hours and Compensation
Analyst / Associate Hours and Pay
To have a point of reference, we will be using traditional M&A investment banking for comparability purposes. RX and M&A analysts in groups with active deal flow work long hours (~80-90+ hours per week).
The compensation between the two groups is comparable, with a sizeable portion of their total compensation dependent on their group (and individual) performance-based bonuses.
At the analyst level, the pay of an RX analyst at EBs compared to the typical analyst compensation tends to be marginally higher (around 5-15% more). But the difference in pay is more tied to compensation differences at EBs vs. BBs, as opposed to RX vs. M&A.
But once an RX analyst begins to climb the ranks, the compensation does seem to outpace M&A because of the smaller pool of potential hires with the specialized restructuring skillset. The difference in compensation is largely due to EBs having leaner operations (e.g., fewer employees, less overhead), meaning that more of the deal fees can be allocated to bankers.
Restructuring Exit Opportunities
RX and M&A are among the best roles for future exit opportunities – thus, your decision should come down to your personal interests, cultural fit, and the reputation of the group. As a result of the experience in more complicated deals and time spent doing more complex modeling work, firms on the buy-side such as private equity funds and hedge funds view them favorably.
For RX and M&A bankers, both are highly regarded on the buy-side as they are more modeling-intensive and gain exposure to a broad range of industries. M&A advisory and restructuring tend to offer a broad range of exit opportunities, but RX does come with a slight edge when it comes to niche areas.
For instance, a background in restructuring would fare better when recruiting for distressed debt funds or specialized direct lenders.
While traditional M&A advisory and restructuring share numerous commonalities with regards to the workload, compensation, and exit opportunities – the transactional considerations and context pertaining to the buyer/seller can cause noteworthy discrepancies in the sale process, deal structuring, key role players, and more.
Restructuring Interview: Recruiting Timeline
Summer Analyst Internships
The recruitment schedule for RX undergraduate internship programs follows the standard M&A investment banking process:
- Information sessions at target schools are held in the spring (and diversity recruiting tend to begin around this time or even earlier in the year)
- HireVue interviews for the next year’s internship program begin to be sent out around August and September
- “Superdays” are held shortly after this time, although the specific dates differ each year and depend on the bank (which became further less predictable due to COVID)
As a potential RX summer analyst, one of the most effective ways to differentiate yourself as a candidate is by showing you have done your research beforehand. In the past, most RX interviews for summer analyst roles have deviated little from M&A interviews, so students could get away with just preparing for RX interviews using the standard methods.
Judging by the increased interest in RX and the growing number of applicants, interviews can be anticipated to become more technical and specific to RX.
However, the good news for undergraduates is that the technical threshold for summer analyst RX interviews remains low. So, when a candidate comes across as competent when discussing RX concepts, it stands out to the interviewer. Considering the steep learning curve for restructuring, coming in prepared with an understanding of RX modeling and being able to clearly articulate concepts has the potential to leave a very positive impression on the interviewer.
Summer Associate Programs
The standard timeline for restructuring summer associate recruiting is as follows:
- Information sessions are held at the top MBA programs around the end of the fall
- Formal interviews are scheduled, often using the school’s recruitment platform, from late January to the end of February
With regards to what skillset is prioritized when hiring laterals in M&A, the past deal experience of the candidate tends to precede all else – as well as the amount of industry knowledge and applicability of their past experiences.
When it comes to former consultants and accounting firm employees breaking into M&A investment banking, an MBA summer associate program normally bridges the career transition.
The same applies to RX, however, those with backgrounds in law are also in the pool of candidates. It is not uncommon to see summer associates working toward dual degrees (MBA/JD) or a JD alone. When it comes to interviewing summer associates, experience working in Big Law can sometimes replace an analyst stint in restructuring in certain cases.
Considering how the work/life balance in bankruptcy or corporate law resembles investment banking, proving the capability of handling the hours and workload in RX is less of a concern.
RX Full-Time Recruiting and Lateral Hiring
Full-time openings in RX are limited and the process is very competitive, as it is on a need-basis – therefore, work experience highly relevant to restructuring is necessary. Applications for full-time recruiting in RX typically open up around the middle of the summer for both analyst and associate roles. By then, most firms will have a sense of their hiring needs based on recent deal flow and expected intern return offer rates.
Full-time and lateral hires are expected to be able to immediately hit the ground running, which gives candidates with relevant experiences a significant edge. As a result, most hires tend to come from:
- Other Restructuring Shops (e.g. EB / BB Groups, Middle-Market RX Banks)
- Adjacent Investment Banking Groups (e.g., M&A, DCM, LevFin, Special Situations, Credit)
- Turnaround Management Consulting
- Restructuring-Focused Big 4 Transaction Advisory
The list above lists the backgrounds of FT times and is ranked in descending order. But note, there is a significant gap between (2) and (3) – the vast majority of FT hires come from competing RX groups at EBs/BBs, followed by other product groups.
For the most part, restructuring views consultants in a better light given the importance of financial and operational expertise. The majority of reputable consulting practices offer services related to restructuring, turnaround management, performance improvement, and bankruptcy advisory.
Candidates from consulting and Big 4 have better odds of directly joining RX FT – nevertheless, it’s no easy feat and only a small minority pull it off.
Target Schools for Restructuring
Given how the leading RX shops in terms of deal flow consist of a small subset of EBs, and practices tend to consist of lean deal teams – one could make the argument that breaking into restructuring is among the most challenging areas in finance.
The recruiting process for summer analysts, summer associates, and full-time hires for RX investment banking the top banks are well-known for being highly selective and coming from mostly target schools.
If you combine the limited openings at firms with how RX has become increasingly sought at both the undergraduate and graduate level, it can be understood as to why it can be difficult to get into RX.
Restructuring Interview: Technical Questions and Answers
Below are a few practice technical questions as commonly seen in RX interviews.
Q. What are the two sides an RX banker can advise on, and which tends to be more time-consuming?
Unless a plan is implemented following the guidance of an RX shop, the debtor will likely default on its debt obligations (e.g., missed interest payment or mandatory repayment) or breach a covenant, if it has not already done so.
The more time that passes without any attempt at solving the problem, the more the quality of the business deteriorates and soon becomes known to all creditors.
Traditionally, mandates on the debtor’s side have been known for being more “hands-on” and requiring more work, but creditors have increasingly taken a more active role in RX. But broadly put, the debtor’s side leads the process, whereas the creditors’ side is more reactionary and dependent on the debtor for providing new material.
Q. What is the most common reason for a company becoming distressed and requiring restructuring?
Becoming distressed requires a catalyst, which is an unmet contractual obligation that puts the debtor in a position where foreclosure is plausible. By a substantial margin, the most frequent reason for a company falling into distress is a shortage of liquidity. And this diminished liquidity is usually due to an unexpected deterioration in financial performance.
But each liquidity shortage and underperformance requires a catalyst for RX to become necessary. More often than not, that catalyst is defaulting on debt obligations, meaning that an interest payment or principal repayment was missed.
For example, a covenant might state that the borrower may not receive a credit downgrade from a rating agency, or else it will trigger a forced call, in which an agreed-upon amount (i.e., negotiated and based in the ballpark of the total of the principal and all interest payments on a PV-adjusted basis) must be repaid immediately. If the borrower is unable to meet the payments as stated in the lending agreement, the lender has the right to seize the assets that were pledged as collateral.
Q. What is the difference between Chapter 11 and Chapter 7 bankruptcy?
Broadly put, there are two main types of bankruptcies:
- Chapter 7: A Chapter 7 bankruptcy refers to the pure liquidation of a distressed company in which all assets are liquidated and then disbursed to stakeholders based on the priority of claims. Following the waterfall schedule, those with higher claims on company assets are made whole before any proceeds can trickle down to the claim holders lower in the capital structure.
- Chapter 11: During a Chapter 11 bankruptcy, a company’s reorganization is overseen by the Court and the objective is to emerge from bankruptcy with a reasonable chance of the company returning to a state of normalcy. Ch. 11 involves putting together a plan of reorganization to identify the impaired classes and the recoveries (e.g., debt holders converted to equity), and the long-term strategy is outlined.
Typically, Chapter 7 is pursued when the chance of reorganization has a low probability of working out, and the reason for the restructuring is related to a long-term structural shift that is near impossible to overcome.
In contrast, Chapter 11 is normally related to mistakes such as placing too large of a debt burden on an otherwise fundamentally strong company, or other short-term mistakes or trends that are “fixable” and often a result of misfortunate timings.
With regards to the recoveries, Chapter 11 normally comes with higher recoveries when compared to Chapter 7 due to Chapter 7 liquidations having a fire sale aspect to them, leading to steep discounts in an attempt to quickly sell the assets of the debtor.
Q. What does out-of-court restructuring involve, and why do many RX bankers consider it to be the ideal option for a distressed company?
In the perspective of most RX bankers, the most practical option for a distressed company is to re-negotiate the debt terms with existing creditors and work out an agreement out-of-court (i.e., without the involvement of the Court).
The majority of out-of-court restructuring negotiations are based on modifying debt terms for the near-term preservation of cash to prevent liquidity shortages. Other common arrangements with the creditors are:
- Extending the Maturity Date on the Debt (i.e., “Amend-and-Extend”)
- Changing the Interest Expense Schedule (e.g., Cash to PIK Interest)
- Debt-for-Debt Swap (i.e., Offer Debt of Higher Seniority for More Borrower-Friendly Terms)
- Debt-for-Equity Swap
- Equity Interests (e.g., Attach Warrants, Co-Invest Feature, Conversion Optionality)
Sometimes, the creditors may agree to a “bondholder haircut” in which the principal/interest of the debtor obligations are slightly reduced so the troubled company can continue operating and avoid bankruptcy. But this is not too common, especially from return-oriented lenders.
To reach an agreement, there often has to be an incentive for the creditor to agree (i.e., there must be something in it for them), or else, there is no logical reason for the creditor to change the debt terms. Often, this comes in the form of more strict covenants that protect their interests as lenders, a higher interest rate in later years (or accruing to the principal balance), and more.
The main reason why an out-of-court restructuring is preferred is that it can be done more quickly and is less costly than an in-court bankruptcy. Once the Court becomes the center of the negotiation process, the fees related to RX advisory, turnaround consulting, and Court fees tend to pile up, especially if it takes longer for a solution to be reached. Also, each decision by the debtor requires Court approval, which can make the implementation of certain actions take longer due to the systematic nature of in-court restructuring.
To answer the question of out-of-court vs. in-court restructuring, there is no right or wrong answer on which is more “ideal.” Unless details regarding the situational context are provided, it would be near impossible to offer a logical response since each has its unique pros/cons that fluctuate in weight based on the circumstances on hand.
Out-of-Court vs. In-Court Restructuring (Source: The Red Book)
Q. Out-of-court restructuring has historically been known for being an expensive, time-consuming, and disruptive process. Which development has helped lessen these concerns?
In the traditional Chapter 11, the process basically starts from scratch and as a result, can take more than a year to complete. Because there was no negotiation in advance, there can be contention between creditors as each creditor is not on the same page. For this reason, the traditional Ch. 11 is often referred to as a “free-fall” because of the hectic nature of the process.
The “fix” for the traditional Ch. 11 is the pre-pack, which involves a pre-planned plan of reorganization (POR) that has been agreed upon by the relevant, impaired creditors before its official filing. Before the actual filing, the debtor has already negotiated with the key stakeholders and begun making the process towards an agreeable solution. Entering bankruptcy, the POR has already had preliminary voting completed that ensures majority support, especially from the stakeholders with the most influence on the POR.
Clearly, this collaboration streamlines the process and enables the debtor to emerge quickly from Chapter 11 (often in less than 45 days). The approval of a POR is based on meeting the sufficient number of applicable votes, but that have already been taken care of before filing, therefore the debtor and creditors are immediately ready to proceed with the voting post-petition (although the Court requires time to review the POR, causing a slight time lag).
Q. What is the absolute priority rule, and give me an example of when it is not actually followed?
The absolute priority rule (APR) serves as the basis of the waterfall structure pecking order in which recoveries are paid out. APR states that no lower-priority class is entitled to be repaid until the higher priority classes have been repaid in full first.
In effect, a lower-class creditor should theoretically not receive a penny of recoveries until the classes above them have received 100% recovery. Based on the priority of claims, each creditor class is ranked based on seniority and receives recoveries in accordance with the APR. Paying creditors out-of-line and in order of personal preference would be a breach of the lending agreement.
Keep in mind, each lender will structure their debt based on the protections provided to them. For example, senior secured lenders will agree to lower pricing because their debt has a lien on the collateral of the borrower and they are at the top of the capital structure. In the event of a liquidation, if those senior lenders are not prioritized as outlined in their lending agreement, the borrower has violated the agreed upon terms. In reality, the recoveries by each class often deviate marginally from the APR as unsecured creditors and equity can be given small payments called “tips” despite the higher priority creditors not receiving 100% recovery.
Lower-class claim holders, if they desire, can intentionally hold up the process (e.g. threaten litigation). To prevent the potential inconvenience and having to deal with these efforts stalling the process, the senior creditors can agree to hand out a partial recovery, despite these creditors not being legally entitled to any proceeds (i.e., the expedited process is worth the senior creditors giving up full recovery).
Q. What is the difference between the “going concern” and liquidation analysis valuation?
In the context of bankruptcies, companies under distress are often valued both as a going concern and as a liquidated business.
- “Going Concern” Approach: In the first approach, many of the traditional valuation methodologies such as the DCF model and trading comps are used, normally with a bias toward being conservative and a higher-than-normal cost of capital assumption to reflect the added risks of the distressed company being valued
- Liquidation Analysis: On the other hand, distressed companies are often valued using liquidation analysis, which as the name suggests, means the total value of the liquidated assets (and this is used as the estimate of the value of the company)
The value of the debtor (and the expected recoveries) must be higher than its liquidation value under the POR – thereby, the liquidation value can be thought of as the “floor valuation” that must be exceeded for approval. So the reason the two are important is that a going concern valuation means the distressed company will NOT be liquidated, which creates the need to prove that the recoveries to creditors under the POR (versus liquidation) are greater.
Liquidation analysis values a company based on the assumption that all of its assets will be sold and the operations will cease to exist. Because of the “fire-sale” nature of liquidations, the assets being sold are usually sold at a discount to their fair market value because of the necessity to collect cash within a short time period to return the proceeds to claim holders.
If the value on a going concern basis is lower, then liquidation would make more sense and be in the best interests of the creditors, who seek to maximize each of their recoveries. The liquidation value includes only tangible, physical assets such as real estate, PP&E, and inventory, whereas its intangible assets like goodwill are excluded.
Q. Tell me what the purpose of the “feasibility test” is under Chapter 11 bankruptcies?
The overarching end goal of Chapter 11 is to ensure the long-term sustainability of the debtor and revert to a “going concern,” as opposed to short-term remedies. And for a debtor to emerge from Chapter 11, the “feasibility test” (or cash flow test) must be passed.
In the feasibility test, the debtor’s projected financials are examined to ensure future financial solvency under the proposed POR. Basically, the forecast of the debtor under various scenarios and after being stress-tested must demonstrate that the post-emergence capital structure is sustainable. Even if the plan is agreed upon by all stakeholders, the Court may reject the plan if the company will eventually have to be liquidated or require further restructuring in the foreseeable future.
Q. One of the main benefits of Chapter 11 is access to DIP financing. Why is this considered to be of such high importance?
DIP financing stands for “debtor in possession financing,” and the reason it is important is that most distressed companies suffer from a lack of liquidity. Once distressed, financing becomes virtually impossible to obtain, but the Court can provide protections that incentivize lenders to provide capital to the debtor. It is not uncommon for distressed companies to actually file for Chapter 11 solely because of the inability to raise capital and the need for urgent financing.
Upon filing for bankruptcy protection, these debtors will immediately file motions to the Court requesting DIP financing, which the U.S. trustee will review to ensure the report was filled out properly and in compliance with bankruptcy laws. Without outside capital, the debtor cannot implement any POR or continue operating at the end of the day.
Q. What does it mean when a DIP loan is “priming” senior secured claims?
Priming DIP loans must be necessary for business continuance throughout the bankruptcy process – and be proven to be beneficial to all claim holders with adequate protection to the claim holders being primed. Priming is in reference to when a new claim supersedes a more senior lender. For example, a priming DIP loan with “super priority” claim status is being added to the very top of the capital structure.
The Court approves of a priming lien only if doing so is deemed to be beneficial to all claim holders and necessary for the debtor to continue operating. In addition, the senior lenders being primed must have adequate protection, which is defined as the assurance that their lien is being protected from loss in value (e.g., cash payments, additional / replacement lien, granting of relief of equivalent value). Often, this is necessary for a lender to provide DIP financing, as, without this level of protection, there would be too much risk for most lenders to participate in the lending.
Q. What is the “fulcrum security” in the context of restructuring and distressed debt investing?
The fulcrum security refers to the most senior security that does NOT receive full recovery. Since the fulcrum debt represents the highest priority piece of the capital structure that received no or partial recovery (i.e., less than par value), the holder is in a position of leverage when it comes to negotiating the reorganization plan.
Put another way, the fulcrum security’s placement is the point in the capital structure in which the “value breaks,” as the residual value that can be distributed to claim holders has run out. And therefore, the holding is the most likely to convert into equity ownership post-restructuring. The class of creditors above the fulcrum security, typically senior secured lenders, were paid in full (or compensated near 100%), whereas the claims junior to the fulcrum security should receive no recovery proceeds at all, in theory.
That said, distressed investors such as distressed buyout funds focus on identifying the fulcrum security not just because it has the highest probability of converting into (or receiving equity) in the post-emergence debtor but as a strategy to control and impact the direction of the POR.