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Restructuring: a worthwhile consideration for long term planning
Conrad Beighton, Head of Midlands for Leonard Curtis, is a licenced insolvency practitioner with 30 years experience advising businesses. Working closely with the asset-based lending and accountancy markets, Conrad liaises with businesses and their advisors to manage complex funding and financial requirements as well as restructuring and insolvency processes across a wide range of sectors.
What are you currently seeing in the market?
We have not yet started to see the full effects of the current economic climate on businesses– the market is busier but that is only benchmarking from where we were during Covid. We are starting to see businesses with concerns around cashflow and creditor management it is clear a recession is looming. Though the Bank of Englandes latest interest rate rises will help counter inflation, there is no doubt they will add pressure on business owners.
Despite restrictions being lifted in April we are still seeing quite a bit of creditor forbearance, but the market remains tough, especially around supply chains and energy prices. We have seen a lot of director fatigue creeping in, particularly in trying to manage increased costs after a few years of unforeseen challenges.
Often businesses just see restructuring as a stakeholder-friendly term for an insolvency process is that the case?
Restructuring is a term used to describe a strategic change to the operations of a business something often misunderstood by business owners. An insolvency process is a formal one whereby an authorised individual deals with the business and assets of a company in accordance with a statutory framework. Sometimes the insolvency of a company may result in the closure of a business, but in other cases a formal insolvency can form part of a restructuring strategy that maximises the benefit for all stakeholders.
How does restructuring help ease the current economic challenge for businesses?
The economic situation has changed more in the last three years than most of us could ever predict. The majority of businesses will have been affected by Covid and related restrictions in some way whether positive or negative. For many, the emergence from the pandemic led them into supply chain issues, increasing transport costs and delays and now all are being impacted by inflation and a resulting reduction in real incomes.
With the outbreak of hostilities in Europe, many realise that the time has come to adapt or decline. A new macroeconomic environment, largely outside of the control of management, requires a new business model to thrive. A comprehensive restructuring strategy provides a blueprint for management to make their business fit for the new circumstances we find ourselves in. For some businesses, adapting to the current environment requires little change. For others, such as traditional retailers with legacy store portfolios, the challenge is far greater.
For all, the restructuring poses the same investment requirement - spend now to secure returns in the future. For some, the cost can be financed by accumulated profits and cash reserves, but for some the scale of reorganisation required cannot be financed internally.
How can restructuring be financed?
Mainstream lenders do not always have an appetite to extend existing facilities to support the restructuring of a clientes business. However, with the right advice, it is often possible to introduce new funding lines to either supplement existing facilities or if necessary, replace them.
A correctly structured asset-based lending solution can be introduced, secured by assets held outside of the business, inside the business but not charged to an existing lender or made available by negotiating priority or release of the subject assets from the existing lender.
Freehold property for example, can frequently be used to secure short term loans to finance the implementation of a restructuring plan. Other asset-based solutions can be as simple as refinancing agreements in order to generate new cash while maintaining existing repayments. Invoice finance can provide easily accessible funds and it is often possible to use specialist providers to fund overseas subsidiaries. Finally, products available in the insurance market can sometimes be used to reassure lenders when seeking extensions to existing facilities or new facilities that are not wholly secured by available assets.
An increasing number of private debt funds are also active in this market, attracted by the premium rate that the increased risk of funding in these circumstances carries. Key considerations will again include the security value of assets within the borrowing business and the certainty and speed with which the restructured business returns to profitable and cash-positive trading.
Where the need for funding extends beyond the capacity of debt providers, businesses can seek investment from special situations private equity investors. These investors are often able to invest rapidly for longer-term returns and will consider the compatibility of investment opportunities with their existing portfolio to drive greater returns.
Our team at Leonard Curtis has experience working across all areas of complex financial restructuring including finance raising and debt advisory, working closely with businesses to navigate the best long-term outcomes.
What does 2023 hold for businesses?
It is anticipated that insolvencies will increase to even pre-pandemic levels across all sectors. Average numbers of insolvencies pre-March 2020 were c 16-17,000 per annum, we think that could break 20,000. Unfortunately, many businesses have become complacent due to the lack of urgency from HMRC and other creditors but this is rapidly changing. With a number of challenges to overcome, man businesses are struggling, and it is important that they seek early advice where required.
Those that will recover will be the business owners who have a proper understanding of the numbers, their place in the market and their biggest assets.
The economic outlook is making restructuring imperative for the long-term health of many businesses. Do not be deterred by the cost of implementing change as with the correct advice, a robust plan can be financed to provide a sustainable future.
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