We live in an uncertain and volatile world. Whether a business operates internationally or locally, the environment is one of ongoing pressures on earnings that make it complex and challenging to plan and do business. In particular, businesses are facing decades-high inflation pressures as well as the knock-on impact of higher interest rates and potentially the widening credit spreads. All of these have a direct impact on a corporate’s financial performance, and can contribute to potential stress. In these situations, an appropriate assessment is essential to ascertain the right capital structure to deal with the potential volatility and stress.
Some early indicators of stress may include:
- Your working capital is under pressure – this is usually the first sign of stress.
- The cash conversion cycle is increasing due to a deterioration in inventory days and debtors days, with creditors tightening up on terms, leading to the increased utilisation of short-term liquidity facilities, which remain hard drawn. You have limited access to longer-term funding to fund any strategic roll out.
- You are facing covenant pressure and potential covenant breaches. These are usually historical in nature but it’s equally important to review through forecasting.
- The overall business performance is experiencing lower GP margins and operating margin deterioration.
- The cost of funding is rising and this is having a negative impact on free cash flow.
An appropriate assessment is essential to ascertain the right capital structure to deal with the potential volatility and stress.
Fortunately, businesses do have levers at their disposal. You can:
- Adopt strategies to help control costs and mitigate the squeeze on operating profits, both in percentage and nominal terms.
- Consider the concomitant free cash flow impacts to ensure a sufficient liquidity cushion to absorb the volatility.
- Restructure existing funding facilities and structuring options for additional funding.
- Assess your business’s core and non-core assets, with a view to sell non-core or non-performing assets to generate liquidity or reduce the demands on liquidity.
- Look to a potential equity raise.
Draw on the right skills
For any business needing to navigate a restructure for optimisation, anticipating or starting to experience stress or the business is currently under financial stress, bring in a dedicated and experienced advisory team that is able to:
- objectively assess the available options;
- develop and execute actionable plans;
- interact and help manage key stakeholders, in particular shareholders and lenders; and
- advise boards and management accordingly.
This will allow you as a management team to focus on your core business while still enjoying access to professional teams to help formulate, assess and execute on restructure options.
The advisers you engage should have a clear understanding of credit risk, funding instruments (and the structuring of these instruments), financial markets (both debt and equity), optimal capital structure assessment tools, asset valuation and M&A capability. Finally, it’s crucial that your advisers are able to navigate the preferred options with you and your stakeholders as well as be able to assess execution risk.
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