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Financial restructuring in 2021: Be ready to answer searching questions

During the early months of the pandemic, a combination of government support and goodwill from banks and other financial stakeholders helped many businesses steer a path through the worst effects. But, as time has ticked on, that path has narrowed. 

Some businesses that survived the initial shock of the pandemic will be looking for more funding to tide them over in the next few months. Compared to last year, it’s going to be a difficult ask. 

The general expectation back in March was that there would be one, possibly lengthy, lockdown, followed by a recovery. It was the first time any of us had seen anything like this, and goodwill – the willingness to give companies a break for six months or so in truly extraordinary circumstances – was in abundance. And not all of the support provided by stakeholders was voluntary – in some cases, notably landlords, it was enforced by the temporary removal of their powers. More than nine months on, we’re deep into a third lockdown for most of the country and many government support schemes are soon coming to an end.

There is light at the end of the tunnel but it’s going to be a rocky few months for many businesses. The risk is that what’s happened before might lull businesses into a false sense of security about their options. Many may expect the same level of understanding and flexibility as before. But we expect lenders will be more challenging this time around. They will want more opportunity to scrutinise plans and forecasts before agreeing to further support. And any support offered may come with more conditions.

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Over the next few weeks and months, 2020 annual accounts will be signed off for companies with a December year end and there will inevitably be going concern issues to address for some. The organisations that have adapted to cope through the pandemic may have used up much of the residual flexibility in their business model and available cash reserves. And time has moved on – we’re a year closer to debt maturity, borrowings are likely to increase and deferred liabilities such as rent have continued to mount up. Many companies are working their way through this final stage of the crisis with higher liabilities, less wiggle room and a more uncertain future.  

Asking for further covenant relief or additional finance a second time isn’t going to be easy, but the good news is that lenders remain keen to support strong businesses, and there is plenty of capital out there for companies seen as a good bet. So what can companies do to put themselves in the best possible position?

Understand lenders’ point of view.

Lenders have had plenty of time to realise that not all companies and business models will be viable in a world that looks very different from before. They will be asking some tough questions: What have you done to help yourself? Have you reined in spend? Are your problems all about the pandemic, or are there underlying issues? Has your market changed? 

Tell a good story.

Negotiations are going to be more challenging this time around and you will need a compelling story around business viability – ideally in the form of a defensible one-year budget and three-year business plan. You will need to show that you’ve identified any changes in underlying trading patterns and customer behaviour and have adapted to them.

Turn up the volume on stakeholder management and communication.

Lenders will be asking searching questions around cash, the business model and balance sheet. Be prepared to show that you have a strong grasp of critical business information and are managing cash closely – cash flow forecasting and scenario planning need to be robust. An equally strong narrative will be needed about plans to strengthen the balance sheet, including M&A and other transactions. If your leverage has crept up, what is your plan to reduce it again? What options are you considering?

Assess your options.

The best sources of capital may not be the usual suspects in 2021, but there is plenty of money around for the right companies. For example, private equity, has more than $1.5trn of dry powder to invest globally, according to Preqin, and PwC estimates that European direct lenders have €72bn of dry powder to deploy.  An advisor can match you up with the right investor. 

These next few months are going to be challenging but financial restructuring will provide the support that many companies need to ride out the storm. For companies that can show that they have worked hard to control costs and adapt, there are good sources of finance available. Once again, preparation is everything if you want to ensure ongoing lender support, access to additional funding and keep control of your future.

Contact us

Gavin Stoner

Gavin Stoner

Partner, PwC United Kingdom

Tel: +44 (0)7801 255652

Alistair Dick

Alistair Dick

Corporate financial restructuring, PwC United Kingdom

Tel: +44 (0)7921 872176

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Contact us

Steve Russell

Steve Russell

Head of Business Restructuring Services, PwC United Kingdom

Tel: +44 (0)7980 844528