17 Jul 2020 | 03.00 pm
Deep Dive Into Restructuring Options
Counsel from Declan Taite in Duff & Phelps
17 Jul 2020 | 03.00 pm
Businesses impacted by the pandemic must be realistic about their trading prospects, plan for various scenarios, and consider restructuring options, writes Declan Taite (pictured), Managing Director at Duff & Phelps in Ireland
As the Irish and global economies slowly begin to re-emerge from their mothballed state, business owners will need to increase engagement with their stakeholders. Based on our experience, there is a need to use facts and ensure transparency in communication with employees, suppliers, customers, landlords, bankers and finance providers.
One of the biggest challenges facing all businesses, irrespective of size or scale, is trying to predict post COVID-19 trading levels. One thing is certain – the business environment in which we operated pre-March 2020 will be different from what we will see as the relaxation of government restrictions begin. Being able to make informed and considered decisions should be founded on facts and obviate the need for knee-jerk reactions.
With the forecasted contraction in Irish GDP coupled with our unemployment statistics and the number of individuals currently availing of various forms of social welfare assistance including the Wage Subsidy Scheme, predicting consumer sentiment and spending levels with any reasonable degree of accuracy can only be speculated.
As trading recommences, certain businesses and sectors may see an initial uptick. However, revenue levels in most sectors may decline significantly. The unpalatable reality is that uncertainty will prevail in the coming months and into 2021.
Of significant and genuine concern for businesses, particularly those in the hospitality sector, will be if they have the financial wherewithal to implement the appropriate measures to ensure staff and stakeholder safety. For example, businesses from retail outlets to bars will have to evaluate the practicality and financial implications of the two-metre social distancing rule and its impact on their long-term survival.
While it is noble to look at the business community as a collective, the reality is that businesses must focus on their own situations and the need to ensure their survival. Having reliable, accurate and timely financial information must be a pre-requisite for all businesses.
Due to the uncertainty ahead, business plans must be flexible and adaptable. Trade will invariably fluctuate, and turnover and costs may not transpire as forecasted.
It is important to prepare alternative outcomes – base case, worse case and best case – to deal with unforeseen issues or fluctuations in trading levels. Decisions must be made, and some may be difficult, but businesses must avoid the ‘ostrich syndrome’. When people ask if they should focus on profitability or cash flow, we simply say that businesses don’t necessarily fail due to a lack of profits but due to a lack of cash.
Cash flows need to be realistic and take full cognisance of the ‘new norm’. Businesses may not have the same turnover levels, the same credit terms, or may not be able to provide 30 days’ credit to customers. Reality must prevail.
Implementing rigorous cash controls with daily monitoring and the constant review of cash and creditor position is vital. Now more than ever ‘cash is king’. Businesses should find ways of maximising cash management and the availability of working capital, including utilising credit terms to their fullest, deferring non-essential payments and availing all government schemes and support packages.
When engaging with stakeholders, it is critical and necessary to document any negotiations or arrangements, temporary or otherwise, that businesses may reach. They may seek the assistance of an accountant, financial advisor or solicitor in properly documenting the outcome of these negotiations, with their bank, or with their landlord if the terms of their lease are amended. This ensures clarity and avoids potentially time-consuming and costly disputes.
If businesses have provided projections, estimated cash flows, estimated profit and loss accounts to their bank and these materially change, it is crucial to communicate same to the bank at the earliest opportunity. While banks are supporting customers throughout Covid-19, they dislike surprises.
Irrespective of which stakeholder businesses are dealing with, the overriding requirement is for open and honest communication. Businesses should never provide inaccurate, incomplete or unreliable information, as it could tarnish hard-earned business and personal reputation.
In seeking to informally renegotiate their position, business owners should understand the broader principles which guide restructuring and insolvency. This can be vital in ensuring that any deal achieved is better than that available through more formal processes.
Balance Sheet Restructuring
Banks and creditors will, in part, be steered by the outcomes they would achieve through more formal processes, and it is essential that businesses do likewise. Many businesses will need to restructure their balance sheet to continue trading long-term. As such, it will be a market feature people will come to expect.
Despite best efforts, sometimes it is not possible to reorganise a business through an informal restructuring, and more formal processes such as examinership and court-approved schemes of arrangement can be useful, to bring about the fundamental changes required for business survival. Depending on circumstances, either or both may be appropriate.
The Irish landscape has more traditionally used examinership as a form of business rescue. The process provides court protection to a company from creditors, for a maximum of 100 days, while the examiner seeks to restructure the business and implement a scheme of arrangement where the creditors must obtain at least what they would obtain if the company was wound up or liquidated.
The process is intensive, is not suited to all companies, and the best outcomes are achieved when pre-planning is maximised. Examinerships can be a relatively costly exercise and should only be entered into with a clear picture of the likely outcomes rather than as a last resort.
The company continues to trade throughout the process, providing management with time and space to rehabilitate their business. This gives those most familiar with the company an opportunity to contribute towards its rescue, and if feasible to retain control on a long-term basis.
Schemes of Arrangement
For challenged businesses, court sanctioned schemes of arrangement under the Companies Act can also be a useful means to reorganise the debt position of a company. Though less used than examinerships, they have specific advantages which can be utilised for timely, cost effective reorganisation. Unlike examinerships, schemes of arrangement do not require an independent expert report and don’t need court protection proceedings (but may be necessary).
A scheme of arrangement for a business continuing to trade is typically brought forward by the company’s directors who can then retain control of the company and continue to trade while the scheme is being implemented.
The benchmark for approving a scheme of arrangement is high, with 75% of creditors by value and 50% by number required to support it. If 75% of creditors support the scheme, then it is binding on all creditors. Historically, this has been a major disadvantage when undertaken outside the examinership process. However we expect that in the new economic reality where large-scale balance sheet restructuring may be needed, these forms of schemes of arrangement may become more prevalent.
The next few months will be challenging for all businesses and there is no doubt that the road ahead will be uncertain, and at times not straightforward. Timely, effective engagement with stakeholders and ongoing honest assessment is the key to business survival.