How can an Informal Restructuring help a company in financial difficulty?
An informal restructuring is usually the “least drastic” solution available to a company in financial distress. They are very flexible, and are achieved behind-the-scenes. They can be achieved in a short space of time or can take years to complete. Many restructurings can be dealt with by a company and its advisors without the need to resort to formal protection under insolvency legislation. At times it is not even necessary to involve external parties, such as the company’s bankers or trade creditors, at all. Commonly though, a company will need to approach its key creditors and agree some sort of forbearance by those creditors whilst the company deals with its problems.
What is the process and timeline of an Informal Restructuring?
The restructuring process need not follow any set formula. The timing of a restructuring will be dictated by each particular situation. Some restructurings can be dealt with by a company entirely internally by focusing on performance improvement. That is, it is not necessary to involve external parties such as the company’s bankers or trade creditors. In more serious situations a company will need to approach its creditors and agree some sort of forbearance by the creditors whilst the company deals with its problems. This is often referred to as a “workout”. Where a restructuring involves creditors, the deal finally agreed between the company and its creditors need not follow a set prescription. In practice, the agreements are often quite imaginative and are designed to suit the specific needs of the situation. The risk and reward considerations revolve around the:
- type of debt instrument taken in exchange for existing debt;
- debt to equity exchange ratio, which will require some sort of valuation;
- proportion of equity dividend to creditors;
- tax treatment of the residual debt and the converted amount.
What is a Workout or Informal Workout?
A Workout or Informal Workout is an Informal Restructuring by another name. Some people use the term Workout when they refer to the restructuring of very large companies involving negotiations with a large number of Banks.
What is Financial Restructuring?
Financial Restructuring is a corporate restructuring process that addresses problems or inefficiencies caused by an inappropriate capital structure of a company or business. It can involve matters such as:
- Converting existing debts to equity;
- Converting preference shares to ordinary shares;
- Debt subordination;
- Debt compromise;
- The sale or transfer of existing debts or equity to more supportive new owners; and
- Accelerated sale of a part of the business.
What is Debt Refinancing?
Debt Refinancing is the review of a company’s debt finance to arrange a more appropriate type of finance or a rescheduling of the current terms. Debt Refinancing usually focuses on the largest lenders to a company and so will focus on Bank and other lenders. Usually whilst a debt refinancing is being undertaken, trade creditors are paid in the normal course of business.
What is Operational Restructuring?
Operational Restructuring is the identification of the causes of operational underperformance and the development of a strategy to achieve improvement. That is, Operational Restructuring focuses on the profitability of operations. It does not address the capital structure or financing structure of a company. The plan will usually cover the following areas:
- Review of products and markets to assess their contribution to profit;
- Alignment of costs with revenues and making appropriate cost reductions;
- Rationalisation of operations and facilities to improve efficiency and release cash;
- Disposal of underperforming and non-core businesses;
- Identification of skills and resource gaps in the management team;
What is Business Stabilisation?
Business stabilisation is a corporate restructuring process designed to help a business through short term and unexpected financial distress, such as the loss of a big contract. The need for Business Stabilisation will arise as a result of some form of crisis. Business stabilisation will involve the implementation of short-term measures usually designed to enhance cash-flow and generate liquidity. It will usually be combined with steps to help rebuild the confidence of key stakeholders. Business stabilisation will create sufficient breathing space to implement a longer term turnaround process.
What is Turnaround Management?
The term Turnaround Management refers to the process of an Expert working with the directors of a company in Financial Distress to identify the causes of the Financial Distress and the development of a strategy to return the company to financial health.
What are the different categories of companies in financial distress?
Companies in financial distress can be classified into several broad categories. We have coined the phrase “Restructuring Spectrum” to describe the broad range of situations a company may be facing. We use four broad categories being:
- Financial Distress;
- Insolvent – Restructurable;
- Insolvent – Liquidation
What sort of solutions are available to companies in financial distress?
For each situation there is an appropriate solution for a company in financial distress. The overriding philosophy is to find the “Least Drastic Solution”. That is, the solution as far to the left hand side of the Restructuring Spectrum as possible. The more to the left hand side of the spectrum your assessment is, the less drastic is the situation. The more to the right, the more drastic. Similarly, the solutions available are less drastic on the left than they are on the right.