When a company faces a mortally challenging event — a large customer is lost or the rise in the cost of capital is untenable — the underlying business may lack the cash flow to support its leverage, ultimately leading to a default. Restructuring is often a way out.
“Restructuring typically is in play when the quantum of debt is large either in dollars or the debt-to-EBITDA ratio is outsized,” says Robert Berdanier, Managing Director at Riveron. “When loan amounts start to degrade — sometimes in the tens of millions — lenders start looking for the exit. Restructuring can be a pathway out for all constituencies.”
Smart Business spoke with Berdanier about the restructuring process — when it should be used, what’s involved, and how it helps.
What is restructuring?
For a business, restructuring means recapitalizing in order to meet its obligations and survive to fight another day. Often corporate leaders retain restructuring advisers to advise though unfamiliar territory. Restructuring advisers will evaluate all aspect of the business to find a solution to the leverage position. They’ll also identify blind spots in the business so the various stakeholders can recoup their investment.
The culmination of the process usually is to find a willing sponsor — the incumbent lender or a new player — to assist the business so it can get through the challenges it faces while allowing the senior lender to take some chips off the table. Essentially the restructuring professional is charting a new path by making changes to terms of the underlying instrument(s).
Restructuring professionals typically evaluate the company’s 13-week cash forecast as well as the business model, then lay in a new capital structure. The ideal end to the restructuring process is that the company realizes a new capital stack allowing a pathway for returns for its shareholders and its lenders. It’s a chance to rethink the underlying thesis of the business, where it’s going, how it will get there and how to make its stakeholders whole. If the issues can’t be resolved, the unfortunate end of an unsuccessful restructuring process is typically bankruptcy.
When should it begin?
The time to start the restructuring process is when an organization recognizes that the underlying business will not support the current capitalization structure. Often the symptoms are expressed through the violation of lender-imposed covenants, shortage of cash, etc. That’s when a financial adviser should get involved and begin the restructuring process. Upon initial realization that a default is imminent, all critical constituencies should be advised. It is always better for the company to convey the information rather than have an outside stakeholder come to that conclusion. The sooner the company has that conversation, the more time all parties can react to it. Preparation for that conversation is key. A well-defined restructuring plan lends credence to anticipated outcomes and thus more leeway is for executing the plan.
Often at the conclusion, companies will propose multiple remedies to include but are not limited to covenant relief, changes in base terms, the introduction of more patient capital or the sale/discontinuation of certain business operations.
Restructuring is not for companies expecting to miss covenants in one quarter but have a pathway out. That situation can be resolved with a covenant waiver and a fee. Restructuring is for companies with a systemic problem that they’re not certain how to solve unless they hit the pause button without resorting to bankruptcy. The company needs to consider who they want to bring in to help with the restructuring process; not all advisory firms are right for the task.
How can restructuring help?
Restructuring is a healthy process. Restructuring allows a company to shed old products and older ideas. Financial restructuring helps companies convince lenders that staying the course is better for everyone. It’s an evolutionary process not to be feared.
Ultimately, companies shouldn’t let their lender get in front of them. Be proactive. Companies should stay on top of their cash forecasting and business model. When they start to see headwinds, don’t wait to engage professional help. Qualified restructuring professionals can help a business puzzle through the issues and communicate a solution.
