Process & Steps for Effective Debt Restructuring

Today’s business environments are characterised by disruptions, uncertainties, severe business conditions and changing landscapes. Heavily leverage enterprises need to confront their balance sheet issues and take a hard look at their long-term viability. Most, if not all, enterprises will face painful decisions at some point such as undergoing a financial and operational restructuring or even insolvency and they can't let pride or past get in the way of making necessary changes and addressing them or they will be heading for the fall.

Today many companies face once in a lifetime market pressures in most industries. Companies have been blindsided by changes in the way customers think, behave, choose and buy products & services. For highly leveraged companies these conditions can lead to a financial crisis that may trigger the need for restructuring.

Whatever the particular situation, an early contingency planning for multiple possible scenarios is crucial. This way you will know their options and will be prepared as the restructuring discussions may not got as intended. Many companies, not only highly leveraged ones, may have to fix their balance sheet in order to resume their long-term viability.

‘Kick-the-can-down-the-road’ scenarios aimed at extending liquidity and providing short term relief from running out of cash, while may work for some companies,  might not be enough for certain companies which need to address disruption and should take a more sustainable long term approach to restructuring. Companies need to align their long-term liabilities with their current cash flow and changing economic realities.

This requires thoughtful planning in anticipation of several possible scenarios. There's no stigma in being prepared rather there is a stigma is not being prepared and often cost. Although different companies may have very different circumstances including financing structures, lenders appetite, market conditions etc. following simple four step process can generally be followed by most and it can help companies get back to their feet and resume the fight from the strongest possible position.

Step 1:  Assemble you Avengers…not really, just assemble the right Team

Whatever is the reason that has triggered a crisis, acting fast is priceless. However, your management team and the Board need to devote their time and energy in keeping the business running including managing relations with employees, customers, vendors, shareholders and the Lenders.

That's why you need to assemble a dedicated team familiar with restructurings, financing and commercial negotiations. Your team should include dedicated in-house employees, financial advisors experienced in restructuring, legal experts, Bankers and public relations specialist to handle internal and external communication, if necessary.

A good restructuring team should develop a several different scenarios that could play out for your company. Finance team members should define the financial options for enabling your business to continue as a going concern along with potential operational solutions for fixing what can be improved with your business and returning it to health. Examples include selling off non-core or unprofitable divisions or assets, exiting unprofitable leases or rightsizing the companies operating expenses. The team should also start conversation and manage negotiations with lenders, customers, suppliers, unions and key stakeholders. Many companies have the chief restructuring officer to head the team and oversee all aspects of restructuring so the management and the board can focus on running the company.

Step 2: Map out your Cash Flow scenarios - Get absolute clarity

Cash is king when a company is in crisis. You should know how much cash you have, and your restructuring team should develop a detailed cash flow forecast (ideally 13-16 week forward looking) so you can get a clear line of sight into your company's liquidity. The focus should be based on direct method model that shows receipts and disbursement that sheds light on your company’s liquidity this will determine which key performance indicators and tracking tools to use to monitor measure and even reward performance.

The cash flow forecast also reveals potential funding shortfalls that need addressing and will help manage suppliers, creditors and having a clear understanding of the funding requirement which is critical for a successful restructuring. A detailed and accurate forecast helps everyone on your management team to stay focused on cash.

Tips for cash flow forecasting

• Cash flow forecast should ideally be for 12-16 weeks look forward
• Conduct a sensitivity analysis that generates a base scenario along with best case and worst-case scenarios.
• Identify breathing room you have.
• Identify all one-time collections, assess the likelihood of timely payments in the worst-case scenario exclude these or assume that if they come in, it will be far in the future.
• Review credit lines and forecast anything that can affect your credit lines and reduce your credit terms. Use of credit lines would also mean extra interest cost.
• Account for capital commitments/movements, legal and advisory fees bank fees and default interest payments (which is generally ignored by lot of companies and can cause serious cash flow issues in a prolonged restructuring situation – Banks love these).
• Understand your financing documentation and credit agreements so that you don't commit a misstep that jeopardise cash availability
• Be aware that any form of insolvency process beat actual or threatened can affect your collections. Customers might look at for alternative suppliers drag their feet in paying or take more credit than usual

Step 3: Map out your restructuring options

Once your restructuring team is in place and has a solid understanding of your cash flow and liquidity, it's time to take a close look at how to get out of crisis and what are the different restructuring options you may have.

Distressed companies typically pursue an out of court restructuring first. For instance, they could raise new equity or debt sell or merge the company or restructure it with existing stakeholders. These are all viable options indeed as out of court restructurings are less disruptive to the business.

Stakeholders can often reach agreement faster than in an in-court process and costs are lower. But out of court restructurings required consent from key stakeholder such as lenders bond holders and shareholders – with regard to how to adjust the company's liability. If time is running out or key stakeholder/lenders cannot agree on next steps, and in court restructuring may be your companies only hope for survival.

Craft a plan to put each option into action. Make sure these include how you would communicate important decisions and changes in your organisation to both internal and external parties. Effective shareholder management is instrumental for success.

Step 4: Execute your plans (Strategy)

Execution – Execution – Execution. Without execution strategy is useless. Once you have determined possible crisis resolution scenarios, start implementing the plans you have developed. Early engagement with stakeholders and absolute clarity on your desired outcomes is key to successful restructuring, as time in hand allows you to adjust and respond to the changes which you didn’t or couldn’t anticipate.

If you are attempting an out of court restructuring first, you will have to execute your communication plan to ensure all stakeholders are properly informed. Engage and enter into negotiations with your lenders and other creditors about the amount your company owes. Clarity of strategy and direction of restructuring early in the process is essential for enhancing your chances of success.

This should extend to all stakeholders. If you can't get consensus or desired changes from those stakeholders you may have to commence an insolvency process but at least you will be prepared, thanks to the planning you have already done. An insolvency process is not the endgame, but your company should come out of the process with a cleaner balance sheet less debt and less burdensome pension, employee contracts and other obligations.

Plan > Assemble > Align > Re-align > Restructure > Survive > Thrive

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