Corporate restructuring: time to get the structure right

Having survived the recession many firms find themselves saddled with large, unsustainable debts as well as a desperate need to restructure the business to return to a growth path.

However, finding the cash for that much needed investment is frequently an impossible task. Add in the difficulty presented by underperforming business units and you have a recipe for trouble.

The answer is to undergo some form of corporate restructuring. In the past this was usually a euphemism for a formal insolvency process such as examinership, receivership or liquidation. Today it means something very different.

“The first thing that you need to do is figure out exactly what the situation is,” advises Michele Connolly, head of corporate finance with KPMG. “You have to look at the debt, the trading performance, the growth areas of the business, and the overall business plan. We would ask them where they want to be in five years’ time. If part of the business is not performing, is that where you want to spend time and effort?”

She points out that difficult decisions may have to be made in relation to those underperforming areas. “Business owners can be very attached to all parts of the business but having an independent voice at the table during the discussions can help them look at things in a different way.”

Luke Charleton, who heads the restructuring team at EY, says there are two main elements – operational and financial restructuring.

“Operational is focused on the business itself,” he explains. “We look at areas like sales performance and cost base to see where they can be improved. Sometimes it’s not just a case of cutting costs but of increasing prices. You can find that companies haven’t had the confidence to raise prices up until now.”

After that it’s a question of looking at the finances and that means debt and equity. Charleton says that the banks are active in lending to companies when presented with a good business plan. This will help when it comes to restructuring debt and making it less of a strain on cash flows.

This doesn’t mean debt write-offs according to Connolly. “It means restructuring the debt to fit what the business actually needs. If the company has survived up to this it’s probably a business their bank wants to support.” The alternative for businesses with good prospects is to take in new investors. This means giving up some equity but Charleton believes that should be seen as a positive thing.

Declan McDonald of PwC says that companies having difficulties with debt shouldn’t be frightened by the prospect of their debt being sold on to a third party.

“Having the debt sold to an investment fund isn’t necessarily a bad thing,” he argues.

“The private equity funds are run by commercial people and they will cut a deal with borrowers. They want to make a profit and are not going to offer significant debt write-offs but if you play ball with them you will get a deal.”