Prof. Ian Giddy New York University Structured Finance: Restructuring

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

Copyright ©2002 Ian H. Giddy Structured Finance 3 What is Corporate Restructuring? l 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 Improve capitalization Change ownership and control Improve debt composition

Novartis

Copyright ©2002 Ian H. Giddy Structured Finance 5 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

Novartis

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

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

Copyright ©2002 Ian H. Giddy Structured Finance 10 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 11 Corporate Restructuring: It’s All About Value l How can corporate and financial restructuring create value? Operating Cash Flows Debt Equity AssetsLiabilities Fix the business Or fix the financing

Copyright ©2002 Ian H. Giddy Structured Finance 12 Restructuring Checklist Figure out what the business is worth now Use valuation model – present value of free cash flows Fix the business mix – divestituresValue 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 equityWhat 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 controlValue the changes new control would produce

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

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

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

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

Copyright ©2002 Ian H. Giddy Structured Finance 17 Restructuring and Structured Finance l 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

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

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Copyright ©2002 Ian H. Giddy Structured Finance 23 Contact Info Ian H. Giddy NYU Stern School of Business Tel ; Fax