Situational Overview: A text book publisher became over-leveraged following a number of acquisitions, and a balance sheet restructuring was needed. The business itself was operating well; however, rumors about a potential bankruptcy were spreading within the industry and it was having a negative effect on new business. Since many of the company’s customers were state and local governments, a bankruptcy would be very risky.
Resolution: A plan was developed that would allow the lenders to exchange their debt for equity in the company. A bankruptcy liquidation scenario was developed that clearly showed a restructuring was the better option for lenders than a liquidation of the company. The challenge in all out-of-court restructurings where there is lender impairment is every lender must agree to the impairment: in bankruptcy that is not the case. In this situation, a sufficient number of supporting lenders signed a restructuring support agreement indicating that they could affect the same restructuring out-of-court as they could in bankruptcy.
Results: Given the heavy cost of bankruptcy and the potentially lower recoveries for lenders, opposing lenders agreed to the out-of-court restructuring. Once the out-of-court restructuring closed, the leadership was able to announce a very positive development for the company. Moreover, the restructuring strengthened their position in the industry as the company had more funds to reinvest in its business.