In recent months, the media has been pervaded by news of real estate companies sinking with billions of investors’ funds. The default action by most investors is to sue the companies for breach of contract, but they end up with paper judgments that they cannot enforce. What alternatives are available to these investors?
Stalled real estate projects grapple with cash flow challenges due to poor forecasting or failure to take corrective action when the actual expenditure does not match the budgeted expenditure. They also grapple with a high debt to equity ratio when a large proportion of the capital comes from creditors (investors that bought off plan) instead of capital from the company’s owners. This makes it difficult to obtain additional financing to complete the project.
The appointment of an administrator by either the company or the creditors as soon as these signs of financial distress appear may mitigate further losses. The first task of the administrator would be to ascertain whether the distressed company is viable. If it is viable they would make recommendations of how the stalled project may be revived. These would be captured in a report that would be made available to the creditors so that they know how to support the company. Some of the strategies that an administrator may use include:
Debt restructuring to tackle cash flow shortages
In cases where the insolvent company is grappling with cash flow challenges, the administrator may negotiate a long-term payment plan with suppliers that may include trimming part of the debt. This will ensure that cash flowing out of the company is delayed or reduced, which helps minimise the strain on the company’s working capital.
The administrator may also negotiate for alteration of interest rates and forbearance of penalties on loan agreements.
Source for turnaround finance
Emergency or turnaround finance relates to financing that is advanced to an insolvent but viable company by financial institutions.
This additional finance provides the company with a cash injection to pay its liabilities and resolve any cash flow challenges that the company might have. The administrator’s report on the viability of the business together with a turnaround plan would give the lenders confidence to advance such facilities.
Appointment of experienced managers
The administrator may also appoint experienced people to help them steer the management of the company.
Reports have shown that poor management is a common factor in distressed companies. The infusion of experienced management into the company will help the administrator deliver on the creditors’ expectations.
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Collaboration with established market leaders
Besides the strategies highlighted above, the administrator may also partner with established market leaders. These partnerships may help revive the company as it leverages economies of scale and access to resources. Additionally, such collaborations offer the company a much needed reputational boost.
How investors in stalled real estate projects may initiate the administration
Creditors, such as investors in the real estate project, may apply to court for the appointment of an administrator. To this end, the investors would need to come together as a unit and file an application seeking an administration order over the company.
Once the application is filed, the court will assess the merits of the application and consider whether the real estate company is insolvent.
Conclusion
Administration of distressed real estate companies offers an opportunity for stalled development projects to be revived if there is timely intervention. Investors are encouraged to watch out for early signs of financial distress so that they can mitigate their losses.
