Structured Finance:
Restructuring
Prof. Ian Giddy
New York University
Structured Finance
Corporate financial
restructuring
 Structured financing
techniques
 Asset-backed
securitization

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.
 Designed to increase the value of the
firm
Restructuring

Improve
capitalization
Copyright ©2002 Ian H. Giddy
Improve
debt composition
Change ownership
and control
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Novartis
Operating Restructuring
The increase in value that comes from the
operating side:
 Better operating margins (usually
economies of scale ie lower costs)
 or
 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
Economic
Profit
Net Working capital
Net Fixed Capital
Goodwill
*Net Operating Profit After Tax
Copyright ©2002 Ian H. Giddy
Invested Capital
Cost of Capital
Source: Ciba Specialty Chemicals
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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
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Financial Restructuring
The increase in value that comes from a
purely financial effect:
 Lower taxes
 Higher debt capacity
 Better use of idle cash
Copyright ©2002 Ian H. Giddy
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Corporate Restructuring:
It’s All About Value

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
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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

Debt

Equity
Copyright ©2002 Ian H. Giddy
Achieve lowest
weighted average
cost of capital
May also affect the
business side
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Capital Structure: East vs West
Nokia
VALUE
OFTHE
FIRM
TPI
Optimal debt ratio?
DEBT
RATIO
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See Saw
Business
Uncertainty
Operating
Leverage
Financial
Risk
Financial
Leverage
Copyright ©2002 Ian H. Giddy
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Getting the Financing Right
Step 2: The Kind of Equity & Debt


Debt


Equity
Bonds? Asset-backed?
Convertibles? Hybrids?

Debt/Equity Swaps?
Private? Public?
Strategic partner?
Domestic? ADRs?

Ownership & control?



Copyright ©2002 Ian H. Giddy
Short term? Long term?
Baht? Dollar? Yen?
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Restructuring and Structured Finance
Restructuring debt to make it cash-flow
responsive
 Converting debt into equity
 Securing asset-backed funding
 Securing mezzanine and subordinated
debt financing
 Securing equity-linked and hybrid
financing
 Raising new equity

Copyright ©2002 Ian H. Giddy
Structured Finance 17
Case Studies
Evaluate the financial restructuring taking
place at:
 Conseco
 Getronics
 Dynegy
Copyright ©2002 Ian H. Giddy
Structured Finance 18
 www.stern.nyu.edu
 www.giddy.org