Coping mechanisms for the restructuring exercise: whats next?

Like many people, I was optimistic that the Covid-19 Pandemic would not only have a limited impact on companies, but I was also quietly hoping that the Pandemic would be short lived.

However, like many, I have been proven wrong. We are now sitting with a supply chain crisis that is devastating in nature and a Pandemic that is seemingly being very stubborn with no signs of it abating. Business scribes have written many articles about the impact of the crisis and the factors driving this. Until we see the back of this Pandemic, these articles will remain relevant.

So what’s the next step for companies who have been financially impacted by the Pandemic? I recently read an article on the McKinsey website which discusses this in detail.

What’s next?
The article points out that very few organizations will avoid the effects of the pandemic. Those that have been most adversely affected can turn to restructuring solutions as markets emerge from the crisis. Stronger companies, meanwhile, can begin thinking about expanding on the other side of that equation, seeking to acquire new businesses or entering new markets.

For companies concerned they may need to act to save their business, there are four key steps:

Avoid denial. To paraphrase the writer David Foster Wallace, sometimes the most obvious and important realities are the ones that are hardest to see. Accept the reality of the situation and engage honestly with stakeholders to identify and implement the correct solutions before it is too late to avoid insolvency. That includes taking the right steps to transform the business in the context of a postpandemic world. Build a robust and sustainable business plan based on realistic recovery expectations that will position the business with the right capital structure to go forward.

Conserve and create cash. The article adds that, to mitigate the pandemic’s effects, many companies refinanced during 2020, raised new equity capital, and announced cost-reduction plans with an initial focus on low-hanging fruit. These moves were based on the assumption of eased lockdown restrictions and restored growth by the end of the year, even if trading had not yet rebounded to pre-COVID-19 levels. With lockdowns reintroduced around the world, new restrictions imposed on mobility, and the emergence of new strains of the virus creating further uncertainty, these initial assumptions are coming under strain, with recovery in trading expected to take longer. There is an imperative then for companies to continually reassess their business plans and potential downside cases with a view toward identifying their liquidity requirements and the actions needed to return financial performance to sustainable levels. Many organizations took drastic measures to conserve cash in their initial response to the pandemic, but with the recovery taking longer than expected, companies should continue to focus on both short-term tactical and longer-term structural self-help solutions that free up or otherwise optimize cash and business performance. Moreover, companies can build the current focus on cash into long-term cash excellence by establishing a “cash culture” across the organization, where preserving cash is a fundamental part of ongoing operations. With more cash headroom, companies can begin to consider allocating capital to future growth opportunities.

Embrace transformational change. As the postpandemic economic recovery slowly takes hold, now is the time for companies to embrace more holistic and radical transformational change to emerge stronger for the next normal. The key will be to balance this within any liquidity constraints and achieve a position where the transformation is self-funding very early on. Companies can take the following steps:

• Reimagining their purpose and value agenda. The COVID-19 crisis has spurred organizations to consider several big questions to better meet customer and employee needs: Who are we? How do we operate? How will we grow? The answers to these questions will help shape how companies will look in the postpandemic future.
• Innovating their products and services and the markets they operate in. By doing so, companies can meet new trends and changes in consumer behavior (as a result of both the pandemic and pre-COVID shifts) while also divesting noncore businesses to raise funds and reposition the business’s focus.
• Radically changing how they operate to reduce structural complexity and increase speed—getting things done well and fast. That includes developing a bias to action while retaining and developing the right talent to deliver on the value agenda.

Retain talent. The article points out that, when businesses are in distress, retaining top talent becomes extremely challenging. But without talent, sustaining performance or restarting growth becomes all the more difficult. Now more than ever, companies are reimagining their personnel practices to build organizational resilience and drive value.

The most vulnerable business sectors
While the advent of various coronavirus vaccines could boost economic activity, some sectors will be harder hit than others, as always occurs when there are seismic disruptions. The travel, leisure, and tourism sector and the consumer sector have borne the brunt of continuing localized lockdowns and travel restrictions throughout Europe. Already, prominent leisure, transportation, and retail groups have had to be recapitalized or placed into insolvency. These sectors are singled out for expected restructurings at a much greater rate in our survey.

The article points out that survey respondents did not find a consensus in addressing the likelihood of restructuring activity in other sectors, though the oil and gas and manufacturing industries appear to be vulnerable too, according to respondents. The pandemic has been a considerable setback for the European automotive sector, with new vehicle registrations, for example, declining about 25 percent last year across the continent’s five biggest car-buying nations: Germany, the United Kingdom, France, Italy, and Spain.

That said, the pandemic’s effects are highly varied. There could be companies that find themselves in distress even within sectors that have been relatively spared from pandemic disruption as compared with the last recession. We will be publishing more on the implications for the higher-risk sectors highlighted by our survey over the coming weeks and months.

Cash stretched thin
Its amazing how many of the strategies used in Europe, as well as the vulnerable sectors, are applicable to South Africa.

The article points out that the Pandemic has wreaked havoc on key sectors of the European economy, particularly those facing consumers. As a result of this seismic disruption, many companies are left with their cash stretched thin and debt that cannot be fully serviced. For these companies, a debt restructuring may at some stage be necessary to ensure they survive. Regardless of loose financial covenants, companies need to be realistic and proactive in all matters, retaining control of the process and their destiny by acting while there is sufficient runway to implement a solution can reduce the risk of an uncontrolled insolvency.

This only proves that the role of BRPs and turnaround professionals are more relevant now than ever before.

Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner