Is the underlying business viable?

Companies increasingly use a wide range of financing instruments in addition to traditional equity and (largely UK clearing bank) debt sources. High yield debt, asset based finance and vendor finance are some of the other sources being used. Engaging these parties in any restructuring is challenging, but add debt traders, vociferous shareholders and credit derivatives and there is a matrix of issues to manage delivery of successful restructuring.

Restructuring professionals must understand the position of these stakeholders and ensure they are managed through the process for it to succeed. Many stakeholders are relatively new to restructuring and understandably focus on managing their own risk without engaging in wider issues.

This can be damaging in trying to develop a consensual reorganisation plan and is quite a change from the ‘London approach’ used during the last recession, where the large banks were able to influence most stakeholders.

The workout departments in banks have had to become sophisticated in the way they manage workouts.

A particular complication is determining where risk sits – credit derivatives and credit insurance have sometimes shifted the equity in the reorganisation away from public lenders. A senior banker recently remarked that despite his institution holding a large gross position in a distressed company, it actually held negligible risk. Why should he be as active in managing a restructuring?

Despite the complexity, identifying the underlying exposures and interests of all stakeholders must be conducted fast to keep options open and avoid any single crisis triggering insolvency. For example, we have introduced distressed debt investors to stakeholders to offer them an alternative to sitting through the restructuring.

A fundamental aspect of business recovery advisors is the need to assess whether there is a viable underlying business. A short-term fix can result in this question being overlooked. Ultimately, without a robust core business, any reorganisation is merely a rescheduling of liabilities. Addressing this early can save much pain and ultimately expense to all involved.

Steven Pearson, head of high yield for PwC business recovery services

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