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THE RISE AND RISE OF

RESTRUCTURING PLANS

Gloomy economic forecasts and a looming debt wall for FY17, bubbles within segments of the property and construction markets, higher banking capital to cover risk and an emphasis on safe harbour reforms for directors will see more corporate restructurings in the coming year. We consider here how plans are developed and how to judge their success.

Setting the scene

 Companies are increasingly stripping away costs, reducing workforces, limiting the hours or changing the rosters of workforces and renegotiating downwards the pricing in supplier and contractor arrangements. The combination of pessimistic economic prospects, greater uncertainty about lending and the need for companies to have more equity, means that market players are drawing up restructuring plans and thinking about how they are going to implement them.

There are important factors at play: the willingness of financiers to back boards and management with transparent plans for the repair of balance sheets and profitability, the rise of alternative capital, secondary market trading, some modern challenges in security enforcements and the recent sanctions imposed on Kleenmaid directors for insolvent trading.

Each of these factors, together with proposed legislative changes to provide a "safe harbour" defence, encourage turnaround planning, and focus on saving an enterprise from an unplanned insolvency event. A good board will have early recognition systems to identify looming liquidity events, financial stresses in the business, sensitivity checks on macro changes in the business environment and a plan in place to sell assets, raise capital, change debt and supplier arrangements and generally right size costs to meet falling revenues.

Obviously events will dictate the precise issues a business will need to deal with, so the following is necessarily very high-level. The stages can be concurrent, or ordered differently, to meet the specific needs of the company under examination.

 

Distress has many progenitors. It may arise from factors as diverse as a breakdown in workforce trust leading to industrial action, a product failure or securities-based litigation claim, automations and disrupted markets, changing consumer patterns (including from offshore buyers), changed regulatory settings or sovereign risk, debt overburdens or looming maturities, debt accelerations brought about by market, interest coverage or other covenant breaches or just old-fashioned management incompetence.

The problem needs to be recognised so that it can be cauterised and eventually form part of the repair within the plan. 

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