Restructuring Interview Questions

Chapter 11 allows a company to reorganize while continuing operations. The debtor typically remains in possession of its assets (debtor-in-possession or DIP) and operates the business under court supervision. Key milestones: the company files a petition (voluntary or involuntary), an automatic stay halts all collection actions, the debtor has an exclusive period (typically 120 days, extendable) to propose a plan of reorganization, creditors vote on the plan, and the court confirms it. A reorganization plan must satisfy the absolute priority rule: senior claims must be paid in full before junior claims receive anything. If a class of creditors rejects the plan, the court can still confirm it through cramdown if the plan does not unfairly discriminate and is fair and equitable.

Understanding the priority of claims is fundamental to restructuring. From highest to lowest priority: DIP financing (super-priority status), secured creditors (claims backed by specific collateral — recovery depends on collateral value), administrative claims (professional fees, post-petition operating expenses), unsecured creditors (bonds, trade payables, bank debt without collateral — often the fulcrum security), subordinated debt (contractually junior to other unsecured claims), preferred equity, and common equity. In most restructurings, there is a fulcrum security — the class of claims where the recovery falls below 100%. Identifying the fulcrum security is the most important analytical step because it determines who controls the restructuring negotiation.

A Section 363 sale allows the debtor to sell substantially all of its assets outside the ordinary course of business, with court approval. The assets are sold free and clear of liens, claims, and encumbrances, which is the primary advantage — the buyer gets clean title. The process typically involves a stalking horse bidder (an initial bidder whose offer sets the floor), followed by an auction where other parties can submit higher bids. Bidding protections for the stalking horse include breakup fees (1-3% of deal value) and expense reimbursement. Creditors may prefer a 363 sale over a full Chapter 11 reorganization because it is faster (often completed in 60-90 days), preserves going-concern value, and avoids the cost and complexity of negotiating a plan of reorganization.

Debtor-in-possession (DIP) financing provides working capital to a company operating in Chapter 11. DIP lenders receive super-priority administrative claim status, meaning they are paid before all pre-petition creditors. DIP loans are typically secured by first-priority liens on unencumbered assets or priming liens on assets already pledged (with court approval). Key terms include a DIP budget (weekly cash flow projections the company must adhere to), milestones (deadlines for key restructuring events like filing a plan), and tight covenants. DIP financing is critical because without it, the company cannot fund operations during the restructuring process. Pre-petition lenders sometimes provide DIP financing to maintain control over the process and protect their existing position.

Distressed debt investors buy the debt of financially troubled companies at a discount and seek to profit through the restructuring process. Strategies include: loan-to-own (buy the fulcrum security at a discount with the expectation of converting it to equity in the reorganized company), trading claims (buying and selling distressed debt based on expected recovery values), and providing rescue financing (DIP loans or exit financing at attractive terms). The key analytical skill is waterfall analysis: given total enterprise value, how much recovery does each tranche of the capital structure receive? If a company has $500M in enterprise value and $300M in senior secured debt, senior secured creditors recover 100% and there is $200M left for the remaining claims.