A capital structure for all seasons

After years of economic strain, South Africa is beginning to see signs of recovery. The formation of a Government of National Unity (GNU), improvements in electricity supply, and lower inflation are fostering a more positive environment for growth and business confidence.

However, it's during such times that companies can be at their most vulnerable. A boost in sentiment doesn’t always lead to an immediate rise in sales, leaving businesses exposed to the ongoing costs of servicing debt, maintaining stock, and covering other expenses.

Cash flow and balance sheets remain under pressure. Even when growth does arrive, companies may struggle with "growing pains" as they face increased costs for stock, staffing, and other resources needed to meet rising demand.

These challenges underscore the importance of an "all-weather" capital structure - one designed to withstand fluctuating market conditions. In this article, we explore the necessity of having a flexible capital structure that supports businesses through tough times while also allowing them to seize growth opportunities.

Further, we have highlighted the role of skilled advisers in helping companies navigate these complexities with an objective, expert approach.

How a poor capital structure can limit growth

When we think of a company having a robust capital structure, we normally do so with tough economic and trading conditions in mind. However, a capital structure is as important in times of growth. As a company grows and evolves, it may find that its capacity to access new debt is constrained and its ability to raise new equity capital is limited.

When there is capital available for growth expenditure, there may be a delay between the deployment and the realisation of cash flows on the investment. Furthermore, a company may also find that the capital structure isn’t flexible enough to deliver on the company’s strategy.

These constraints can seriously limit a firm’s growth ambitions and its ability to enter new and exciting markets.

In today’s challenging business landscape - marked by inflation, high interest rates, political shifts, and uncertainty - building a resilient capital structure is more critical than ever. Despite an improved local outlook, companies remain exposed. Breaching debt covenants is a genuine concern, and many firms may be forced to increase dividend cover or suspend dividends altogether to safeguard cash flow.

Understanding restructuring and advice

Whether your business needs relief to navigate financial pressures or seeks advice to achieve strategic growth, securing the right capital structure is essential. Bringing in an external adviser not only adds expertise but also provides an objective, unbiased perspective, ensuring your capital structure is tailored to your business's specific needs and goals.

There are four steps to go through when working with an adviser, which we set out, in the graphic below.

What are the benefits of a capital restructure process for an executive team?

A capital restructure under tight deadlines can be daunting, but correct guidance not only allows you to focus on running your business, but ensures the key elements of the restructure are successfully executed.

You and your fellow executives may not necessarily have the time or expertise to navigate and execute on the various options identified, particularly when your skills are in the nuts and bolts of the business or fulfilling your customers’ needs.

At the same time, it’s important to highlight that you should not relinquish control over the process: decision-making remains the responsibility of the executive management and board. In fact, engagement with stakeholders should only be with the requisite representation of the executive management.

Moreover, all options need to follow the requirements of non-disclosure and compliance with the Companies Act and the stock exchange regulations, where applicable.

Questions to ask

Certainly, choosing the right advisory team is critical to the company's success, however management should always ask a few questions before engaging in advice:

• Does the adviser have the right executory expertise and experience? This includes an understanding of the market conditions and parameters.
• Does the adviser know the market dynamics, shareholder and debtholder appetite, and structuring parameters?
• Does the adviser have the reputation, brand and access to inhouse expertise, where needed?
• Does the adviser have the right relationships with key market stakeholders to practically execute the restructuring or funding plans?

With the right advice, you can ensure that your capital structure is robust and adaptable, allowing you to focus on driving your business forward while critical elements are managed. In doing so, companies can better position themselves to weather economic fluctuations and capitalise on new opportunities.