Debt restructuring is unforgiving; little things matter. Many companies stall or collapse unnecessarily because they are poorly prepared.
No one does restructuring for fun. But the process also eats an enormous amount of management time and energy that should be spent keeping the business itself on the rails. Handled badly, it can destroy value for everyone.
Before you sit down with the bank, write down exactly what you are looking to achieve. Most companies have much the same goals.
To gain some cash and more time.
To bring short-term liabilities into line with cash projections.
To make sure that the company can still borrow working capital if it needs to.
Lenders want the opposite. They want more security, higher pricing, or less exposure. If they sense that their borrower is not properly prepared, it is not unusual for them to pile in with more demands, leading to an uglier deal and unexpected delays.
A Standard List of Questions
Lenders have a standard list of questions they tend to ask when a borrower looks troubled.
What has gone wrong and how long is it going to take to fix?
Do we think the business is fixable and worth the effort?
Is management right, with good advisers, and able to do the job?
How much new money is needed, what is it for, and how long is it for?
What do shareholders plan to put in?
Where do the other lenders stand?
What are the other options for the company and the bank?
What terms will we provide support on?
Put yourself in the lender’s seat and think through what your answer to each would be. Thinking them through also helps with one of the toughest parts about restructuring: where to focus.
A Detailed, Driver-based Business Plan
Cash matters more than profits when debt is in trouble. Lenders look first at the amount of cash left to repay them. Full, clear information makes it easier for the credit committee to come through with approval. Expect every number, however small, to be examined closely.
A restructuring needs to be built on a detailed, driver-based business plan that ties operating projections into a company’s actual past results, a clear picture of the current position, and a realistic set of achievable assumptions for each of the projections. Build realistic projections of cash flows available for debt servicing (CFADS) going forward. That requires detailed reviews of most parts of the business, normally starting with those areas that have the greatest impact on future profitability and cash conversion. The plan spells out what actions are needed to reach each target, the tenor of any debt the company is seeking, and where the cash comes from to make the plans work. It should also explain what shareholders plan to contribute.
There is little that lenders like less than a borrower who is in denial. The first part of a restructuring plan must be an honest, sober assessment of what happened. Find and accept the real causes, and when management messed up, own the mistakes right up front. Denying them or blaming the lender for not supporting the business enough is the quickest way to torpedo a deal.
A restructuring is never just about dealing with the bank, getting a clean set of books, and maybe some new loans. Major surgery needs to be done on the business itself. Putting a bandage on things for the restructuring rarely works; companies often end up back at the negotiating table.
Keeping legal entities straight is critically important. Make sure that amendments and new funding go to the right entities within the group. Check that cross-defaults, negative pledge clauses, and borrowing limits all allow the changes. Putting intercompany and related-party receivables into the correct entity requires extra work that has been known to block a lender deal. Another thing is debt capacity on an entity by entity basis: it may force some hard decisions about parts of the group.
Management is in the limelight during restructuring. People respond to management that they believe is competent, accountable, and reassuring. The members of the team do not need to be likeable, but they must be trustworthy. They must stand up and be responsible, act with efficiency and focus, and show good governance.
Lender Support
Lender support depends on two things.
What kind of security the lenders hold and its likely market value.
Whether the business can service the proposed new debt in future.
Draw a map of the old loans, the value of the lender’s security, and what entity the debt sits in. Expect the major fight to be over who bears the cost of the restructuring, the shareholders, or the banks. New money providers tend to want super-seniority, which the existing lenders naturally fight hard not to give up. Borrowers can badly underestimate how hard striking a balance between their old lenders and the new ones is.
With so many moving parts, companies can be overwhelmed by how complex a restructuring is. Consider bringing in advisors to run the process and help mediate discussions between lenders, shareholders, and other stakeholders. Take advantage of their expertise. The changes to how the business operates and is governed must be carefully planned to balance the risks and rewards of each stakeholder.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
