Achieving agreement among key relevant parties in a restructuring negotiation can often be very challenging due to the competing expectations and positions of various stakeholders of the company. As a result, a mutually acceptable consensual restructuring is hard to achieve. This means in practice it is more common that a non-consensual deal needs to be executed.
Disagreements can occur both within the same security class, for example, a group of secured lenders or across different classes of security. So unsecured lenders might disagree with the views and plans of secured lenders.
In situations where key parties are not aligned, it is essential to identify the players that most likely don't have any economic interest in the company, were it to be wound up, or in other words, the out of the money parties. Although they may be noisy in the negotiations and kick up a lot of fuss, their wishes and opinions won't be so relevant to getting a deal done if the company remains as a going concern. These out of the money players will most likely have their capital compromise and won't be part of the capital structure following execution of the proposed restructuring plan. Out of the money players are typically shareholders and some unsecured creditors, but knowing exactly which parties are in or out is always a contentious debate. As this is based on individual players' views on company enterprise value.
The parties usually engage external advisors to run detailed valuation exercises to assess a fair valuation range for the company. The goal is to identify the fulcrum security or the instrument of the capital structure, which is unable to be fully repaid with the company's remaining assets. Also commonly referred to as where the value breaks.
For example, if a company has $100 million of secured first lien debt, $100 million of secured second lien debt, and $100 million of unsecured debt, and the valuation exercise deems that $150 million is a fair enterprise value for the company, then the fulcrum security would be the secured second lien debt. As this is where the value breaks. The unsecured creditors and any equity shareholders would be out of the money in this situation.
Once identified the in the money players can consider using legal restructuring tools to push through whatever deal they agree to, even Without the consent of the out of the money players. However, these legal restructuring tools will typically require that the restructuring plan is approved through bankruptcy courts. So even if the in the money parties agreed to a non-consensual deal, there is still the risk that this may not be approved outta the money. Parties may seek to launch legal challenges to the non-consensual deal if they feel that the valuation range suggested by the more senior creditors is low, or if they believe they were somehow treated unfairly during the process.
If ultimately, it is not possible for a deal to be implemented, even if the legal tools have been deployed to deal with dissenting parties, the company will end up facing legal bankruptcy procedures and potentially being liquidated.
