Embark on contingency planning sooner rather than later

EMBARK ON CONTINGENCY PLANNING SOONER

RATHER THAN LATER

Towards the end of 2019, Deloitte’s restructuring services business unit relaunched in what turned out to be a timeous commitment to supporting ailing businesses ahead of Covid-19. The unit, headed up by Jo-Anne Mitchell-Marais, has conducted important research into restructuring, revealing exactly why businesses should embark on this process at the first signs of financial distress. By Victoria Williams and Georgina Guedes

Ninety-four percent of respondents to Deloitte’s Restructuring Industry Survey, carried out at the start of 2021 believe that the probability of a company being turned around is 50 percent or greater if restructuring advice is sought when the early signs of distress become apparent. This is a crucial aspect of restructuring – the sooner the process begins, the greater the chances of business success. The report states that within the restructuring industry, experts talk about the “demise curve”, which outlines the many scenarios in which companies may find themselves, from the early stages of poor financial health (where informal and consensual restructuring plans apply) to financial distress and insolvency (where the options available to the company decrease as they enter into formal negotiations typically led by creditors). A worrying trend identified in the survey results was that participants felt that companies are delaying seeking formal restructuring advice due to management teams and boards not believing that the financial distress warrants intervention (55 percent), and that management teams are concerned about being seen as incapable or incompetent (25 percent). This trend is even more concerning right now, when many more businesses are grappling with survival as a result of the ongoing Covid-19 business downturn. Of the respondents, 88 percent expect an increase in activity levels in the restructuring industry over the next 12 months. Despite this, the survey found that informal restructuring solutions, are preferred over formal solutions and the unfavourable stigma attached to companies in business rescue is a challenge to the success of the formal restructuring process. Between April 2020 and 31 October 2020, according to the Companies and Intellectual Property Commission (CIPC), there were 233 business rescue cases filed in South Africa including some major players such as Comair, Edcon, Virgin Money, Phumelela Gaming and House of Busby. Many of these companies were already struggling before lockdown sent the economy into its deepest recession yet. The manufacturing, wholesale and retail, real estate, accommodation and food service activities and construction sectors have been particularly hard hit. While no updated business res-

Jo-Anne Mitchell-Marais

cue statistics are available post October 2020, the most recent report on liquidations in South Africa references an increase of 49 percent in the number of liquidations in March 2021 compared to March 2020, further confirming the struggle of South African enterprises. Many of the companies who enter business rescue will not survive. “We are entering a period of prolonged recovery fraught with uncertainty and risk where we are likely to see many more business failures – for both large and small business,” says Jo-Anne Mitchell-Marais, the Africa restructuring services leader at Deloitte, who authored the Restructuring Industry Survey report. Jo-Anne is a UK chartered accountant by qualification and has specialised in solving financial distress over the past 15 years.

Being proactive is vital

For Jo-Anne, being proactive rather than reactive is vital to navigating a period of financial distress: “In the restructuring market, and as the survey results showed, we oftentimes see that there is an element of denial in large companies where there is insufficient planning and understanding of what contingency plans should look like for the ‘what if’ scenarios. The sooner a company considers corporate contingency planning, the more options are available to return the company to financial health.”

A corporate contingency plan is a proactive strategy that outlines the course of actions the management of an organisation can take in response to an event that could happen in the future. In the case of a financially distressed company, this could include a restructuring, a sale of assets, filing for business rescue or even liquidation. “It's important to work out what the worst-case scenario looks like. Once you have that picture, you can make more informed decisions,” says Jo-Anne.

Key risks for the financially distressed

Financially distressed companies face several risks that need to be addressed. If debt covenants are breached or repayment dates are missed, lenders may call for the immediate repayment of loans. This in turn can accelerate a descent into business rescue and possibly liquidation.

“There is an element of denial in large companies where there is insufficient planning and understanding of what contingency plans should look like for the ‘what if’ scenarios.”

Likewise, suppliers worried about the company’s financial performance may call for payment upfront, which puts further pressure on cash flow. Employees fearing retrenchment may seek alternative employment, with the best employees being the most mobile. It is also not uncommon for an overseas parent company to want to shed its local, loss-making subsidiary. In a case like this, Jo-Anne says it is important for leadership to have tough but honest conversations with all stakeholders. This includes negotiating with investors, lenders, suppliers and being transparent with staff. “You can’t just be a director in the good days. Every management team wants to stay in control of their business. Early, proactive communications are so important to remaining in control,” says Jo-Anne.

Maximising cash flow

Managing a financially distressed company’s cash flow becomes a top priority for any restructuring professional. This includes combing through the financials to pick-up unnecessary and irregular expenditure and investigating which contracts are causing a cash drain. Reducing office space required or negotiating with the landlord for a better rate can also be considered. Thoroughly understanding the cash conversion cycle and working capital requirement is also fundamental to making decisions that have a positive cash flow impact. Once the cash flow has been analysed, investigated, challenged and remedial measures put in place, it is critical to ensuring that debt repayments match the revised cash flow profile. “Companies benefit from an outside perspective. At Deloitte we can use artificial intelligence interventions to produce quicker data, which in turn enhance decision making,” says Jo-Anne. Interventions are identified to optimise working capital and identify quick wins.

Resilience

Working as a restructuring professional requires resilience. “What makes the job difficult is that we are always dealing with directors at a tough stage in their lives. It’s very lonely in these circumstances and oftentimes they must make the difficult, unpalatable decisions. We have to be there to support directors and guide them to these decisions. In these times, it is the success stories that keep us going,” says Jo-Anne. l

Deloitte restructuring services

The Deloitte restructuring services business unit was relaunched in November 2019, headed up by Jo-Anne Mitchell-Marais, and has positioned itself for restructuring projects throughout sub-Saharan Africa. The financial advisory division, under which restructuring services falls, has dedicated teams in South Africa, Nigeria, Ghana, Kenya and Zambia, and has recently completed a project in Cameroon. Since the restructuring services relaunch, Covid-19 has ramped up the demand for its services. In such times, restoring a company’s financial health may include a pivot into doing business in a digital world, by being agile and improving accessibility to digital tools. In this case restructuring services could call in the assistance of Deloitte’s digital transformation strategies unit. Restructuring services can also work in collaboration with Deloitte’s tax, corporate finance, risk advisory and forensics divisions for the benefit of clients.