Founder: Turnaround Talk
Last week, we took a closer look at some of the restructuring trends that are forcing companies to sit down and rethink their businesses.
As pointed out in the previous editorial, because our laws and legislative environment are heavily influenced by international law, the trends driving international restructuring are particularly pertinent within the South African context. Added to this is the added threat that Eskom will be facing a year of capacity issues because the Koeberg power station will be operating at half capacity for the majority of 2022 as it undergoes urgent maintenance. This means that the threat of loadshedding is more of a probability than a possibility.
Today we will take a look at the final two trends that are driving restructuring globally.
Trend Four: Transformation gathers pace
The acceleration in digital transformation in many sectors as a result of the pandemic opens up increased opportunities for innovation and growth on the one side, while making some operations and even whole companies unviable on the other.
Operational restructuring is needed to modernise capabilities and streamline operations, as some sectors have seen wholesale structural change in recent years with this only set to continue.
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Divestment of noncore and underperforming operations is enabling businesses to refocus resources on recovery, transformation and growth.
ESG’s move to the centre of the strategic agenda presents comparable challenges and opportunities. This is a chance for businesses to regenerate the environment, create fairer societies and build greater trust with customers, employees and policymakers. But perhaps more importantly this is a huge commercial opportunity. In automotive, for example, the potential is highlighted by the take-off in electric and hybrid vehicle sales in 2020 and 2021, following a decade of steady but unremarkable growth. The challenges include how quickly carmakers can accelerate the transition away from petrol and diesel vehicles, not just in production, but by making electric models sufficiently affordable within the mass market.
Further considerations for businesses in all sectors include how their strategy and performance will rate from an ESG perspective. Our UK Act Now report highlights the growing importance of ESG in credit and investment decisions. Businesses with no viable ESG strategy could find it increasingly difficult to secure financing.
Even in economies that are currently dependent on oil and gas, the focus on decarbonisation and the development of alternative opportunities is clear. The Gulf states, for example, face pressure to play their part in tackling climate change. There is also domestic pressure for change as a result of the volatility in fossil fuel markets in recent years and resulting economic instability. In line with these trends, the Saudi Tadawul and Qatar Stock Exchange (QSE) are racing to launch ESG indices in 2021, following Dubai Financial Market’s early lead with the 2020 launch of the S&P/Hawkamah ESG UAE Index.
Just like ESG, diversity and inclusion are having a growing impact on stakeholder perceptions and financing decisions. Our latest Act Now research has found that nearly 60% of UK investors are more likely to extend financing in a company with a diversity and inclusion policy. Again, this is more than a tick-box exercise. For example, sectors suffering some of the severest talent shortages such as technology, construction and logistics are also among the least diverse. More women and others from under-represented groups within the workforce would help to bridge these talent gaps. It would also help these sectors to better understand changing consumer demands.
Priorities ahead:
- The big question for companies as they look to future-proof their strategy and capabilities is where to direct often limited financial resources when there is so much pressure to change on so many fronts. Operational modernisation, ESG and diversity and inclusion are all likely to require significant investment. Companies will need to factor in the impact of implementing such changes into their consideration of the appropriate capital structure and funding requirements.
- Careful planning and prioritisation are essential now that ESG and diversity and inclusion are weighing ever more heavily on credit decisions. This presents opportunities as well as challenges. For example, we’re seeing a growing number of financing arrangements linked to ESG targets, KPIs and information and monitoring requirements.
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Trend Five: Expanding restructuring toolkit
Legislation and innovation are improving the speed, choice and flexibility of restructuring options / solutions.
The expected uptick in restructuring is coinciding with the introduction of useful new options and the removal of many of the barriers that have held up proceedings in the past.
An extensive list of recent developments includes the new UK Restructuring Plan and Dutch ‘scheme’ (WHOA), as well as new legislation in Germany, Belgium, Ireland, Greece, Brazil, India, the UAE and KSA. We’ve also seen Hong Kong benefiting from greater cooperation with courts in Mainland China and the Cayman Islands are awaiting the implementation of a formal restructuring regime for the first time.
One of the key considerations for lenders where legislation is more debtor-friendly, such as the new UK Restructuring Plan, which includes the ability to cram down dissenting creditors across classes, is how to be on the front foot in challenging such proceedings. What has become clear from recent cases, is that it will be key for lenders to have an implementable alternative plan and as such early engagement with the debtor and access to information will be increasingly important.
Priorities ahead:
- It’s important for companies to determine which tools best serve their purposes and consider whether they can access more favourable options outside those available in their local territories.
- Businesses may look to use legislation to help tackle some of the issues emerging from the crisis, including to potentially restructure excessive fiscal debt arising from Covid-19 related support. Lenders will need to be on the front foot in challenging such proceedings, particularly where these are more debtor friendly.
So where does this leave BRPs and restructuring professionals?
Two major trends stick out, particularly because they are both opportunities and challenges.
If we cast our mind back to last week, the first trend that is driving restructuring is that the brakes are coming off. This means that companies will be accelerating their restricting efforts to become early adopters of a paradigm that will be driven wholly, or predominantly (70%) by technology. Asset heavy companies that rely on bricks & mortar stores will make way for asset light companies that exist predominantly on the web.
This will require a major shift in thinking and capital investment in order to accommodate this. The biggest question with this trend is: can financially distressed companies afford this kind of investment? More importantly, will the company be able to navigate their distress if they do not make these investments? How do BRPs and turnaround professionals prioritise capital expenditure and asset allocation to accommodate this, particularly in a market that will be facing electricity issues at some stage this year.
The second trend, which is also a challenge, is the expansion of the restructuring toolkit. We are going to see a clean out of the old guard and a lot more young professionals taking up influential positions in companies. You cannot turn a company around if you do not cater for the needs and demands of your target market. And that age dynamic has experienced a major shift in the last five years. The biggest question with this trend is: do these young professionals have the necessary leadership skills to turn a company around? How much mentoring will have to take place in order for this to be a success?
These two trends are as important for BRPs and turnaround professionals as it is for financially distressed companies. Are you equipped to cater for the current needs in the market or do the breaks need to come off in your business? Is there a need for your company to expand your restructuring toolkit? If you are not doing this, your competitors are, which puts them in the pound seats.
