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RECALIBRATE: DEBT REORGANISATION AS A CONSENSUAL SOLUTION

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The Central Bank, in its latest Financial Stability Review, 2020 has warned that the scale of economic shock due to COVID-19 is unprecedented and we are perhaps only at the end of the beginning as the challenges emerge. The review further goes on to state Uncertainty remains about the likely mortgage default rate resulting from Covid-19. In some cases, the income shock for mortgage borrowers will persist beyond the length of the payment break and will require additional forbearance, restructuring or resolution

While the Irish Government has announced various measures like SBCI COVID 19 working capital scheme, Temporary Wage Subsidy Scheme, Microfinance Ireland Business Loan, etc to combat working capital challenges for businesses, many businesses might not meet the criteria. This certainly will put more stress on the liquidity of such companies. It is likely that due to this, a number of companies, will not be in a position to meet their financial obligations and might eventually fail to sustain in certain cases. But such a scenario should not always lead to insolvency or winding up of business operation. In such cases, Debt reorganisation acts as a consensual solution for all the stakeholders involved. This article sets out the debt reorganisation solutions available to a company, in case such a scenario transpires.

FORMS OF DEBT REORGANISATION

1. Debt Restructuring

This approach involves reducing financial distress by renegotiating the debts of any company with its creditors to allow the business to restore liquidity and embrace business continuity. Ways in which a company can leverage debt restructuring techniques are as follows:

  1. Renegotiate the terms of the credit or debt facility by extending the period, reducing interest or requesting grace period for repayment of the debt.
  2. Debt- Equity Swap: This process involves conversion of debt to equity. Under this arrangement the creditors/ lenders agree to forego a certain amount of outstanding debt in return for equity or stake in the business. The lender converts the amount of loan into an equivalent ownership/stake in the company. This option helps the company maintain its cashflows by ceasing the obligation to pay back the capital and interest amount. Thus, it is a method by which a corporation improves its financial position by eliminating liabilities and protecting its assets.
  3. Informal Debt Agreement: This process is dependent on the bargaining power of the Debtor and their repayment history. Under this debtor company may reach out to its creditor and lenders to negotiate for lenient terms or a partial write off of debts.

2. Debt Refinancing

Debt Refinancing involves replacement of the existing debt by another debt with more favourable terms. Under this arrangement another prospective lender agrees to acquire the existing debts and pay down the former lender. This is a more popular method considering the quicker process and positive impact on credit score. Again, this helps the company in taking advantage of better interest rates and more time period in certain cases, thereby freeing up cash and meeting working capital requirements to rebuild operations

The current economic landscape is changing rapidly, and companies are finding it difficult to assess if they can avoid breach of debt covenants. Thus, in this regard, it is important for business owners and individuals to familiarise themselves with discussed available options and formulate strategies accordingly for their long-term survival.

WHAT QUESTIONS DO YOU HAVE?

We are happy to help. Please contact our corporate finance department on 01 677 9000 who would be delighted to assist you. Alternatively, you can send us an email to info@cooneycarey.ie.

To keep in touch, connect with us on LinkedIn.

Posted on July 21, 2020 by Cooney Carey

REVITALISE: PREPARE FOR THE NEXT NORMAL NOW: OWN THE NARRATIVE

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Our Previous article Respond: Shielding Your Business From COVID: Black Swan Of 2020 provided six recommendations to respond to the disruption caused by the COVID pandemic. One of the key recommendations was to focus on assessing the cashflow of the company.

It would be worthwhile to mention that cash and liquidity have played a very crucial role to maintain business continuity in any financial downturn- the current crisis is no exception. Even businesses with a strong balance sheet have struggled to sustain the financial blow during recession. Thus, to ramp up operations and reshape your business, you must monitor your cash and develop robust financial forecasts, allowing you to effectively navigate through possible contingencies. We recommend the following practices to the ensure the same:

1. Restructure variable costs and reconsider planned capital investments.

Reviewing and reducing the variable costs would help a company effectively reduce its cash outflows. Inevitably, the current crisis has clearly cut down various variable costs like expenses relating to travel, hiring and entertainment. But companies must consider reducing further variable costs wherever necessary. To mention a few, companies might consider reducing contract labours, encourage its employees to take available leaves and leverage technology wherever possible. Further to restructure its cost model, companies must revisit their investment plan. It is essential to defer capital investments that would produce results in the long haul and only implement the ones that would help the company rebuild or maintain its competitive advantage in the foreseeable future.

2. Manage inventory effectively

Uncertainty is the only certainty during such downsides. A resurgence of a COVID-19 wave cannot be ruled out. Thus, companies are still exposed to the risk of experiencing supply-chain disruption in future. To deal with any such event, companies will have to revisit their inventory safety parameters, add further inventory to their existing buffer stock and renegotiate its arrangements for stockholding facilities with suppliers, to tackle any possible demand and supply side volatility.

3. Synergize payable and receivables

An alternative way to preserve the working capital of any business is to effectively balance its payables and receivables. Prioritize paying suppliers that are critical to servicing the demands of the customers and extend payment terms with others. Companies should use this approach cautiously, as they certainly would not want to strain their supply relationships. Just like any company would be strategizing to delay payments to their suppliers, its own customers might also be planning to do the same to the company. Thus, it is all the more important to revisit the company’s collection process. To strengthen the same, companies should focus on the KPI’s of payment performance. For instance, incorporating working capital metrics to the company’s standard revenue and profit tracking report, will give a better picture about the day-to-day sales outstanding, collection rates, percentage of customers who pay late, timely invoicing, etc. This will help the companies strategize better in improving their collection process.

4. Forecast and re-forecast

A plausible way to navigate through this uncertainty, is planning and preparing your business for multiple scenarios through financial forecast or projections. To perform a forecast effectively, it is advisable that companies must define the following:

  • Four future scenarios
  • Indicators that differentiate such scenarios
  • Time period- short, medium and long term for each scenario forecast
  • Key drivers of the business

 

WHAT QUESTIONS DO YOU HAVE?

We are happy to help. Please contact our corporate finance department on 01 677 9000 who would be delighted to assist you. Alternatively, send us an email: info@cooneycarey.ie.

To keep in touch, connect with us on LinkedIn.

Posted on July 16, 2020 by Cooney Carey

RESPOND: SHIELDING YOUR BUSINESS FROM COVID: BLACK SWAN OF 2020

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Unforeseeable, detrimental and hindsight bias are the three characteristics of a “Black Swan Event”, a phrase coined by former wall street trader Nassim Nicholas Taleb and very commonly used in the world of finance. Owing to the unpredictable and unprecedented disruption/ loss that the COVID 19 pandemic has caused to Governments and businesses worldwide, it certainly meets the criteria of a Black Swan Event.

But how your businesses will emerge at the end of this war in not only dependant on the legislative and economic factors but is also reliant on the responsiveness and preparedness of any organisation. Thus, it is imperative for companies to take the following steps immediately:

1. ASSESS THE CASH POSITION OF COMPANY

With the government restrictions imposed on the operations of various businesses, the old adage “cash is the king” has re-emerged. It has become all the more important to re-evaluate the cash flows and working capital needs of any business. Companies must update their cash flow forecasts to reassess their current situation. They will have to stress test such cash flow forecasts against multiple scenarios and reconsider the working capital their business requires for the weeks ahead.

2. MODEL FINACIAL IMPACT

The stress testing of cash flow forecasts and financial impact model against scenarios ranging from worst to best case scenarios will help the company understand the impact on profitability. This will further assist them in assessing whether it will be able to meet its debt covenants and determining when the available cash sources or credit facilities should be used.

3. DEFINE WHAT IS FUNDAMENTAL AND SACROSANCT

Companies will need to focus on products, services and customer segments that are core and critical to maintaining the cashflows requisite to keep businesses afloat. Further, companies should consider deferring unnecessary capital expenditures and other unwarranted spending wherever possible. While minimising such expenditures, they must follow a mean and lean culture.

4. ENGAGE WITH RELEVANT STAKEHOLDERS

Clear and transparent communications will have to be established with stakeholders like suppliers, employees, customers, regulatory authorities, creditors and investors. In circumstances where contractual obligations cannot be met due to temporary COVID 19 restrictions, companies should consider deferring payments by invoking “force majeure” clauses or re-negotiate the terms of the underlying contract with relevant stakeholders. This will help their business mitigate any future liabilities or punitive damages arising out of non-performance of contractual obligations.

5. GATHER FUNDING FIREPOWER FOR THE FORESEABLE FUTURE

By performing the above assessments and tasks, companies will be in a better position to ascertain their capital/funding needs. Based on the outcome, companies may consider alternative financing options like invoice discounting, working capital loans, factoring, trade finance, etc. This will help the company preserve its cash position and avoid unnecessary cash pressure.

6. AVAIL GOVERNMENT SUPPORT POLICIES

Companies should not hesitate to seek support of various financial and taxation related policies enacted by the Government in the wake of COVID 19. To list a few, it should consider availing supports like Temporary wage subsidy scheme (TWSS), waiver of commercial rate due to local authorities, Loan Repayment break or even applying for loans available under SBCI scheme or ISIF.

WHAT QUESTIONS DO YOU HAVE?

We are happy to help. Please contact our corporate finance department on 01 677 9000 who would be delighted to assist you. Alternatively, send us an email: info@cooneycarey.ie.

To keep in touch, connect with us on LinkedIn.

Posted on July 9, 2020 by Cooney Carey

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