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Debt, restructuring and long-term growth
Alex Cadwallader, board director for professional services group Leonard Curtis, considers the role that restructuring and debt can play in securing a sustainable, long-term future for business owners.
Is restructuring just a stakeholder-friendly term for an insolvency process?
No, ites a common misunderstanding, but restructuring is simply a term used to describe a strategic change to the operations of a business. 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 demise of a business, but in other cases a formal insolvency may form part of a restructuring strategy that maximises the benefit for all stakeholders.
How does restructuring help ease the current macroeconomic headwinds?
The macroeconomic environment has changed more in the last three years than most of us could ever predict. It is difficult to imagine an industry unaffected by the Covid pandemic and related restrictions. 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.
As we progress through 2022 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 world we find ourselves in.
Immediate expense for future returns, what is the scale of the challenge?
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 what about those where the scale of reorganisation required cannot be financed internally. Is decline inevitable?
Can you finance the restructuring with debt?
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, sometimes on an interest-only basis, to finance the implementation of a restructuring plan. Other asset-based solutions can be as simple as refinancing existing 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 also the certainty and speed with which the restructured business returns to profitable and cash-positive trading.
What about when the balance sheets arent strong enough?
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 in order to drive greater returns.
In summary, the macroeconomic 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.
Leonard Curtis is investing in its fast-growing debt advisory team who are delivering tangible results in this space and supporting companies in the wider, non-distressed market also.
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