Restructuring Through a Refinance Arrangement

We are likely to see an increased number of businesses suffering from business financial distress caused by the COVID pandemic and potentially the effects of inflation that we are likely to see during 2022.

We are likely to see an increased number of businesses suffering from business financial distress caused by the COVID pandemic and potentially the effects of inflation that we are likely to see during 2022.

As an insolvency and restructuring practitioner, I often hold meetings with clients and their advisors about insolvency and restructuring options that might be available to them when facing financial distress. During these conversations, what is usually missed is the parties looking at the business and its fundamental core elements to determine whether the business can continue to exist and thrive after the restructure.

Suppose such a situation exists for a client or business, and I am requested to get involved or provide advice. In that case, it is worthwhile including in the discussion around what insolvency options exist, that option of refinancing through a restructure.

Often the businesses are too far gone regarding outsourcing the refinancing or seeking additional capital to solve the liabilities that exist in the business. Once a business has reached that point, they are usually forced to consider the various insolvency options available to them.

When I sit down with a client in such a predicament, we then discuss and explore the various types of insolvency and restructuring options that are available to them. Those the options can include;

1. Voluntary administration

2. Liquidation

3. Small business restructuring process

4. Safe harbour

5. Restructure through a turnaround plan

Each of these options serves a particular purpose for the special situations that may exist in a business that is in financial distress.

Voluntary Administration or Small Business Restructuring Options

Under a voluntary administration or a small business restructuring process, the aim of using these options is to restructure the business through a compromise of creditors debts in order to allow the business to continue to trade and exist.

These processes include various reporting and investigations undertaken by the insolvency and restructuring practitioner, which outlines to creditors what findings they have found during their involvement and subsequent investigations to have been undertaken by them.

The insolvency practitioner then presents a restructure proposal that is usually in the form of either a deed of company arrangement or a small business restructuring plan and then analyses these proposals by commenting and forming an opinion on these kinds of proposals.

Often those proposals come from the directors of the business, and it is in the form of making a payment either in a lump sum or, over time or through various asset realisations which the insolvency practitioner then uses to pay creditors a partial payment of their debts. The key to these proposals is that the creditors must vote on whether they wish to accept the proposal offer.

Whilst I have seen proposals that may pay sufficient funds for a full payment to creditors in full, it is a very rare situation, and usually those plans put forward are not realistic and fail.

Restructure through a refinance

We haven’t seen too often a restructure of the business combined with refinancing and restructuring of the finance facility that may assist in the business. Once the appointment has occurred, we usually see the commercial banks stepping in to realise their position through either the appointment of a receiver or receiving the proceeds realised by the insolvency and restructuring practitioners appointed in a formal capacity as either an Administrator or Liquidator.

We rarely, if ever, see the commercial banks step in and offer a new facility that comes off the back end of the restructure proposal that the directors have put forward to its creditors. What perplexes me concerning this position is that usually the reason why businesses cannot obtain financing before a restructure is because the extent of the liabilities that have been accrued are too significant for the financier to feel sufficient comfort that they can see the businesses survive without a restructure.

That statement suggests that if the size of the liabilities and financial exposures were reduced or even compromised, this could provide an opportunity for a financier to feel sufficiently comfortable because of a stronger financial position from a balance sheet perspective that’s enabling finances to then offer financing.

The ability to implement a coordinated formal restructure combined with a new financing facility or refinancing of an existing facility is not an easy approach to complete. Most often the businesses and its directors have already exhausted all available capital sources (both from a business and personal perspective) to keep the business afloat. Thus, when it comes to providing sufficient security for the new finance facility, the monies required exceeds what is required to achieve funding.

Deal with the financial concerns much earlier

The solution to deal with such a situation is that the business needs to deal with its financial problems much earlier in the risk life cycle than traditionally. What is meant by this is that if the business, its advisers and even its finance brokers can see that there is a trend of financial underperformance starting to occur, rather than just ignoring the issue, and classifying it as a potential short-term problem. It might be worthwhile testing and investigating whether the start of early warning signs around financial performance is likely to lead to a more serious and sustained long term financial problem.

As a restructuring practitioner, we are often engaged, usually by the major commercial banks, to undertake an investigating accountant’s (“IA”) report. What this report achieves is essentially a deep dive and close analysis into the financial performance of a business, looking at trends, investigating the strength and accuracy of forecasts and then commenting on whether those numbers are realistic or require adjustment with further investigation. Often it goes further and provides recommendations and solutions to fix the problems.

The form with which an IA report is completed can be as high-level or as detailed as the client wishes. Often businesses don’t want to spend money using their advisors to monitor, comment or support the business around financial performance simply because they do not value their worth or cost to do the work.

Businesses tend to just want to use the advisors, particularly accountants, in undertaking the statutory and compliance work that the business must undertake. This approach baffles me given that if a business can identify this downward spiral of a underperformance in the business much earlier, they can surely undertake a restructure or even a slight adjustment to the way the business has been run if identified earlier.

Small changes such as a headcount reduction, changes to cheaper alternative suppliers, and implementing a technological solution can make the business run more efficiently. We see these kinds of work and intensity when private equity buys into a business. The various types of private equity that exist in the market all the hire high analytical and commercial performers into their business model.

Whether the private equity is a distressed buyer of businesses or a buyer of profitable growth business, the individuals who work for the private equity firm are responsible for managing and working with the portfolio company they have invested in. All highly skilled individuals are obsessed with financial performance and cash management, thereby identifying underperformance early in the risk cycle.

In addition to this obsessive focus on finance and numbers, they are also willing to spend money to fix the problems that might exist in the functioning of a business. Usually those fixing solutions relate to the use of technology to make the processes or functionality of their business operate better.

Private equity is motivated in doing these changes quickly because they usually have a set time period for their investment and usually always an exit strategy in mind with regards to that investment.

I suppose the question I ask is why any business owner can’t have the obsessive like focus the private equity players have in their own businesses. The great business owners do.

What can a finance broker or adviser do?

As a finance broker, you may want to take a closer look at the business as well as its fundamentals to see whether changes need to be made. Either to the business processes, tweaking of financial forecasts to make the forecast more accurate and realistic or other steps that might be taken to strengthen the business. If you don’t have the skill set, engage someone that does.

Indeed, having a client that becomes a more robust and more extensive operation will only mean that the next financing facility they seek out will be from you and much larger.

How can Cathro & Partners assist

At Cathro & Partners, we work with finance brokers and other advisors to assist them in investigating and analysing businesses to create greater visibility around financial performance and potential future challenges that may come into that business.

The aim of our firm is that we get asked to get involved much earlier in the process. Rather than being engaged as an insolvency practitioner looking at formal insolvency solutions like voluntary administration and liquidation, we are engaged to undertake a role that includes restructuring, undertaking a possible turnaround process and/or often preparing and investigating accounts report for consideration. These engagements often require C&P working alongside with management, their financiers and finance brokers. Plus, its advisers to rectify the early warning signs that may start to creep into a business but are identified early enough to be rectified to avoid insolvency and ultimate failure.

Recent Articles

In the latest episode of The Cut, Simon Cathro plunges into the intricate world of insolvency law, discussing its multifaceted challenges and opportunities. With us on this episode is Emily Barrett, a partner in the restructuring and insolvency team at Johnson Winter Slattery. Emily’s deep understanding of the industry and

The biggest inclusion in the Federal Government’s 2024 Budget from an insolvency practitioner’s perspective was that recoveries to repay outstanding superannuation is now a consideration when the FEG recovery program is looking to fund liquidators’ recovery actions. The Fair Entitlements Guarantee (“FEG”) Scheme, administered by the Department of Education and

In the latest episode of The Cut, Simon Cathro delves into the intricacies of Deeds of Company Arrangement (DOCA) with guest Sam Dundas, a partner at King & Wood Mallesons. Together, they discuss the complexities of insolvency law, with a particular focus on DOCAs. Sam shares insights from his extensive