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Adequate cash? Viability? Act now to recover quickly

Author: ICAEW Insights

Published: 10 May 2021

During these turbulent times conversations between insolvency and restructuring practitioners and their clients may touch on attracting investment. This is nothing to be apprehensive of says Mike Jervis, Partner, Restructuring and Insolvency, at PwC UK.

He sits within a team of close to 50 UK partners and 500 staff tasked with anything from cash management through to formal insolvency. This includes working capital optimisation, debt refinancing, the sale of the company or business, formal restructuring plans, insolvency transactions such as administration and many activities in between. At present, the group is engaged particularly with the retail, travel, hospitality and leisure sectors. Now more than ever, Jervis says, the combination of sector and broad subject matter expertise is crucial to helping businesses address the challenges they face in a tough economic environment.

Around one-third of the team in which Jervis operates are insolvency-focused including a number who advise on both restructurings and insolvencies. Additionally, many insolvencies do not impact trading operations – there may be light-touch methods to solve capital issues and they may simply be required at a holding company level. Some of that activity has more in common with corporate finance than formal insolvency.

Be proactive, preserve cash

Jervis believes that planning is the most important thing for boards of companies of any size to undertake. “It cannot be overemphasised. Even when this process means having to have difficult conversations with creditors and similar, these should take place early, before a problem becomes a crisis. Time can become the enemy in restructurings. By being proactive, the board has a chance of remaining in control,” he says.

Preserving cash is a vital part of the equation and has been throughout the pandemic. Companies need to have forecasts that are reasonable and robust, but these must be stress-tested and subjected to sensitivities and vulnerabilities in the assumptions which underpin them. “Make sure there's enough cash to cater for different outcomes,” says Jervis. 

“Now that we are 12 months or so into the pandemic, the two questions that keep coming up from companies and key stakeholders to those companies are 1) how much money does this business need to get it through the next, say, six, 12 or 24 months of restart and recovery, and 2) is there a viable business here in the longer term, taking into account the many changes which are forecasted to impact business and consumer behaviour in the future,” says Jervis.

The questions are complex and the answers inevitably vary, depending on sector, size and starting point.

Jervis points out that directors’ duties are always high on the agenda, for companies of all sizes. “A lot of the questions to us will come from management teams wondering what to do next. Some of that can be driven by a lack of understanding of their duties as directors, or simply worry about unfamiliar areas, particularly given the unprecedented nature and scope of the crisis,” he says.

“At this time, non-executive directors can be useful as an independent sounding board. It is great when you see companies having regular board meetings and making full use of the independent non-executive directors who can take much more of an overview than they would be able to take if they were deeply involved in the ‘weeds’ of the business.”

In addition, there is the option of augmenting the board with new directors with specific restructuring experience.

A deals-led recovery

But what happens if you are the director of a company that cannot survive the crisis with its current resources, but one which needs to raise funds or otherwise seek investment? Jervis says: “The good news is that, for the right cases, there is capital out there seeking investment opportunities, especially from the private equity and hedge fund markets.”

He points out that what differentiates the current crisis from that of 2008 is the availability of that cash and the volume of investors looking for deals. The emergence from the 2008 problems was work-out driven, with creditors keeping a close eye on distressed companies, to recover their exposures, often slowly over long periods of time. This time, the recovery is shaping up to be a deals-led recovery, with investors providing the capital and therefore good businesses are likely to emerge from the pandemic much more quickly than their erstwhile predecessors in 2008.

Directors should ensure their companies and businesses can stand up to the rigours of due diligence. A conversation that Jervis also hears repeatedly is about the quality of information and whether it is up to date. The company management often needs to augment and improve the information they ordinarily produce when it comes to progressing through due diligence. 

Investors will look at financial bridges between historic performance, current trading and the longer-term business plan. They will expect to see thoughtfully prepared, detailed plans as to how the improvement will be achieved, by whom and over what period. Business plans will have to cover a longer period at present than they did historically since the recovery from COVID will take longer than a more conventional recovery.

“The quicker you catch a falling knife, the more prospects you’ve got of saving the business,” he says. “If you leave it too late, the situation becomes much more difficult to control. It’s about seeking advice and acting early on, taking advantage of all the government and related support schemes, and looking at alternative structures.” 

And it is important to remember that companies that have made it so far have hopefully weathered the worst of the economic shocks – cause for optimism, at one level.

This takes us back to those two vital questions asked above: how much money does this company or business need to restart and recover; and is there a viable business? Jervis points out that this second question asks whether the pandemic has changed the trading landscape so much that the business in question cannot return to the position it was in prior to the virus, without significant restructuring and repositioning. “Those are questions which a lot of companies are asking us to help them answer at the moment,” he says.

“But in doing this job you cannot separate the business problems from the individual directors’ outlook,” says Jervis. The pandemic is no one's fault. Directors and management should take some comfort in that. It is more important now than ever before that advisers empathise with the individuals impacted by these overwhelming business conditions.

“And by ‘management’,” says Jervis, “it is important that this is not perceived as purely an issue for SMEs or family businesses. Many directors have invested sweat capital as well as financial capital in the businesses we advise, often alongside investors from the private equity and funds worlds.”

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