Overview

Companies restructure their product mix to boost sales and profits, increase shareholder value, or survive when the corporate structure becomes impaired. In successful restructurings, management not only actualizes lucrative new projects, but also abandons existing projects when they no longer yield sufficient returns, thereby channeling resources to more value creating uses.

At one level restructuring can be viewed as changes in financing structures and management. At another level, it may be operational in response to production overhauls, market trends, technology, and industry or macroeconomic disturbances. It is often the essence of strategy formulation that is, management s response to changes in the environment to creatively deploy internal resources that improve the firm s competitive position. Indeed, changing operating and financial structures in pursuit of a long-run strategy is a key corporate goal, representing the most direct path to shareholder value.

For banks called on to finance corporate restructurings, things are a bit different. For example, most loans provide a fixed return over fixed periods that are dependent on interest rates and the borrower s ability to pay. A good loan will be repaid on time and in full. Hopefully, the bank s cost of funds will be low, with the deal providing attractive risk adjusted returns. If the borrower s business excels, the bank will not participate in upside corporate values (except for a vicarious pleasure in the firm s success). However, if a borrower ends up financially distressed, lenders share much and perhaps most of the pain.

Two disparate goals controlling default (credit) risk, the bank s...