Preservation

The expansive debt-fuelled years of the late 1990s brought nightmare to many businesses. But, as Richard Willsher discovers, the fine line between those companies which managed to ride the storm, and those which disappeared, simply comes down to how well they dealt with their distress

Once, refinancing might have meant replacing debt at a lower cost and a queue of bankers at your door keen to lend you more money. But then things take an unexpected turn. You are staring restructuring in the face and refinancing means making the best you can out of a deteriorating situation.

At the centre of the impending storm, more often than not, sits the finance director. With an eye on financial projections over the next 12 months he or she may be able to see the future of the company a little clearer than colleagues. 'The key trigger,' explains Phillip Davidson, head of restructuring in the UK at KPMG, 'can be when he realises that the company may not be able to meet a major financial obligation such as a loan repayment. Perhaps, due to changes in the company's circumstances, it may not be able to refinance that debt.' He adds that that may be a critical moment for the FD. It is easy to ignore what is coming up in several months, and simply do nothing, or hope that the funds will be there when they're needed.

Another critical moment may be when it becomes apparent that the company may breach its loan covenants. Failing to carry out a quarterly review of those covenants as a matter of good practice could cause a nasty surprise later on, both to the company and to its bankers.

Clearly, looking as far ahead as possible is an important part of the finance director's job. Having spotted a potential difficulty it's his call as to when and how he brings it to the attention of his colleagues, in particular the managing director.

By then others in the company may already be arriving at a view of the company's situation by a different route. The sales director can see whether sales are dipping. The head of procurement can see prices of input materials spiralling. Whole sectors may be affected. For example, in the last three years many players in the energy and telecoms sectors throughout Europe were forced to take radical steps to address their plight. Energis, Enron Teeside, Northern Gas Processing, cable companies NTL in the UK, CableCom in Switzerland and Callaghan in Germany, were all cases in point. In each case restructuring was the only way forward.

The finance director's role is clearly crucial. There are key steps for him to consider taking with immediate effect.

• Cashflow is of paramount importance. Close monitoring is vital.
• Tight budgeting is imperative.
• What expenses can be cut away?
• Is it time to speak to other stakeholders in the business: bankers, bondholders, shareholders, employees, suppliers, customers? Sooner or later they'll need to be brought on side.
• Should the company sell assets to release more cash?
• Is it time for staff cuts? Time for changes to the board?

An FD will require good communications skills in situations like this. But Andrew Merrett, assistant director at Close Brothers Corporate Finance, who focuses on restructurings, notes: 'Very rarely do creditors expect any member of a management team to be relieved of their duties from the outset. Creditors accept that businesses have ups and downs. The finance director should not fear for his job but should focus on dealing with his stakeholders as best he can. He needs to have good relations with his bankers and other creditors. He should take advice on the provisions of insolvency law in the jurisdictions where the company operates. This goes for the board too, because the risk is that, unless they take the correct actions, they may find themselves personally liable for the debts of the company.'

In particular, FDs should avoid surprising lenders to the company with bad news. 'They may become worried and even forceful if they are not getting good, timely, high quality information about what is happening at the business,' says Merrett.

The options for refinancing the business can include raising more senior debt, accessing mezzanine debt, issuing mid yield or high yield debt, maybe a debt for equity arrangement is part of the deal. Each situation will give rise to its own structure and its own refinancing solution. For sure the funding will be more expensive than the company's existing borrowing, reflecting the higher risk faced by the lenders; and the involvement the funders may want to have in the business is likely to be much closer as they look to cover their downside risk.

The FD's job will have radically altered from the way it was in better times. KPMG's Phillip Davidson notes that the ability of the FD to adapt to change is vital. 'He must be persuasive, honest and a good communicator. Pragmatism is also important. Short term measures may not be good for the longer term growth of the business but they may be what is needed now.' Lastly, he adds that crisis management skills are also valuable and external help may be required. In the US, for example, a chief restructuring officer may be brought in to sit alongside the CEO and may lead the company through downsizing or exit from markets or products as necessary.

It is usually in the interests of all stakeholders that the measures taken bring the company through the bad times. Lenders and shareholders will not wish to lose their money. Suppliers will want to retain their customers. Customers to the business will want to keep buying its products. Employees will want to save their jobs. Some, if not all of these groups, may be persuaded to make sacrifices to keep the business afloat. Convincing them that this is the case is something the finance director will be called upon to do. Just being a good accountant will probably not be enough; this is where all the other soft skills that he or she has accumulated through training experience will have a critical role to play.

Richard Willsher is a financial and business writer with a background in investment banking. He is former editor of The Investor magazine.