When a company cannot pay its cash obligations – for example, when it cannot meet its bonds payment or its payments to other creditors it goes bankrupt. In this case, a company can choose simply shut down the operations and walk away. On the other hand, it can also restructure and remain in the business.
What does it mean to restructure? The process can be thought of two folds: financial reconstructing and organisational reconstructing.
Reconstruction from the financial viewpoint involves renegotiating payment terms on debt obligations, issuing new debts and reconstructing payables to the vendors. Bankers provide guidance to the firm by recommending the sale of assets, the issuing of special securities such as convertible stocks and bonds, or even selling the company entirely.
From an organisational viewpoint, a reconstructing can involve a change in management, strategy and focus. “I-bankers” with expertise in “reorge” can facilitate the ease and transition from bankruptcy to the viability. Typical fees in reconstructing depends on whatever retainer fees are paid upfront and what new securities are issued post-bankruptcy.
When a bank represents a bankrupt company, the brunt of work is focussed on analysing and recommending the financing alternatives. Thus, the fee structure resembles that of the private placement. How does the work of private placement differ? I-Bankers not only work in securing financing, but may also assist in building projections for the client, in renegotiating the credit terms with lenders, and in helping to re-establish the business as going concern.
Because a firm in bankruptcy already has substantial cash flow problems, investment banks often charge nominal monthly retainers, hoping to cash in on the spread from issuing new securities. Like other public offerings, it can be a highly lucrative and steady business.