Restructuring growth review

After a difficult 18 months, the Irish economy still faces challenges. Following the withdrawal of government support measures, companies must now deal with inflationary cost pressures, supply chain issues, labour shortages and an uncertain economic outlook.

Many previously robust businesses are struggling to identify solutions to these issues, which is undermining their viability. In many cases, key stakeholders in businesses, notably management and equity investors, are finding themselves excluded from the capital structure. This often weakens performance and is a disincentive to future investment.

To ensure businesses are best positioned for a tough trading environment, all stakeholders’ interests must be realigned for the ‘new normal’.

How to review

Given the momentous changes affecting Irish businesses over the past 18 months, companies must review their performance to identify weaknesses in their business model and to set short and medium-term priorities. Considerations include:

CHANGES IN THE MARKET

The business environment can change quickly, from new competitors and innovations to a general slowdown in the economy linked to the pandemic and geo-political situation. The underlying themes for many businesses are the same – volatile trading, high input costs, and the inability to secure staff and key components. As a result, many businesses are reviewing their business models to identify new market opportunities, cost savings and opportunities to improve performance. This exercise should ensure your business is structured for the ‘new’ normal and is not simply based upon an outdated, pre-pandemic model.

PROBLEM CONTRACTS / SERVICES

Many companies have encountered serious issues with contractual obligations over the past 18 months, undermining their viability. These issues include significant delays to projects starting, inflationary pressures on fixed-price contracts, and being unable to recruit and retain the required staff. If the underlying business remains viable, a reorganisation of the contractual base can address the losses and ongoing costs associated with problem contracts.

PRESERVING BUSINESS VALUE

Losses associated with the pandemic combined with a variety of geo-political, economic and strategic issues have adversely impacted the value of many businesses, primarily due to a decline in EBITDA and any associated multiple. The associated value of a business can therefore be less than the value of the secured debt, meaning the secured lenders are the effective owners of the business. If the underlying business remains viable, a reorganisation addressing the levels of debt and operational costs may significantly improve the value of the business.

THE ‘NEW NORMAL’: APPROPRIATE STAFF LEVELS, FUNDING AND OPERATIONAL COSTS

The past 18 months have seen the Ireland adapt to the ‘new’ normal; working from home, home-schooling, lockdown, quarantine and wearing face masks in public – all of which have had a significant impact on personal, social and economic interactions. The ‘new’ normal requires companies to improvise and adapt to overcome its associated issues. A thorough review of company operations, with a view of the markets in which it operates and the general direction of travel, will highlight any issues.

UNSUSTAINABLE CREDITOR PRESSURE AND OTHER SUPPLY PROBLEMS

The government introduced moratoriums to prevent recovery action by creditors during the pandemic, and Revenue Commissioners offered generous deferrals and a Debt Warehousing Scheme which gave businesses vital breathing space. However, the Employment Wage Subsidy Scheme, which replaced the Temporary Wage Subsidy Scheme on 1 September 2020, ended on 31 May 2022. The Covid-19 Loan Scheme available to COVID-19 impacted eligible SMEs and small mid-cap businesses is due to close to new applicants on 31 December 2022. Companies must act now to address the mounting pressures.

UNDERSTANDING FREE CASH FLOW

At first glance, many companies seem financially healthy – trade is picking up and they have cash in the bank. However, many businesses have stretched creditor terms and built-up significant creditor arrears, including rent and
Revenue debts. Many cash positions are artificially high, and as trading normalises the unwinding of these arrears coupled with weakening performance will place significant strain on company cash flow. Many businesses are not equipped to prepare accurate forecasts to manage this process and inform their stakeholders.

How can we help?

RSM’s team of experienced professionals can assist at each stage of the process, including:

Sector analysis

As a full-service firm, we are well-versed in dealing with a wide variety of industries and the issues therein. Our industry experts keep abreast of both current and forecast developments, and so can advise on the associated threats and help you to take advantage of opportunities.

Cost reduction identification and implementation

Our operational experts have considerable experience in driving efficiencies across a wide range of business sectors, including liaising with the relevant stakeholders, and advising on the available options. We have a proven track record of successfully turning around projects in tight timescales.

Stakeholder engagement and alignment

Our experts have worked with numerous lenders and management teams to ensure the optimum balance between debt, equity and incentivisation. This has contributed to driving the recovery of struggling businesses.

Performance improvement step plan

A detailed step plan is an essential part of any reorganisation. This ensures each stakeholder understands their role and responsibilities, the associated timescale and the overall direction of travel. Our reorganisation teams have extensive experience in this area, liaising with our internal experts to understand the nuances of each sector.

Funding options

Our debt advisory experts draw on a large pool of funding providers to deliver tailored solutions to a wide variety of situations, such as short-term working capital funding, distressed funding support, asset purchases or funding restructuring processes.

Restructuring options analysis

While value is best preserved via early engagement, we can react swiftly to deteriorating situations by liaising quickly and effectively with the relevant stakeholders. We also have extensive experience in implementing strategies to address creditor pressure (including cash flow management) and supply chain issues, ranging from immediate actions to longer-term plans.