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Keeping control under financial stress: assess your options and manage the stakeholder landscape

Gavin Stoner Partner, PwC United Kingdom

The next few months are likely to be a rocky road for businesses as the UK economy struggles to recover from the impact of the COVID-19 pandemic. The worst is undoubtedly yet to be felt; the full effects have been temporarily cushioned by government intervention such as the Job Support Scheme, its predecessor the furlough scheme, various loan support schemes and certain legislative protections provided by the new Corporate Insolvency and Governance Bill. But some of these defences are starting to end and all will have a finite life, so businesses need to be prepared.

We’ve already seen businesses fall into administration in the hardest hit sectors. It’s likely that others will follow – but many more can be saved if the right decisions are taken at the right time. This is why we see the early identification of issues and assessment of options followed by pro-active stakeholder management as one of the four critical areas that businesses need to pay close attention to in the coming months. My colleague Steve Russell likened these to the four wheels of a car – if just one fails for any reason, a crash is inevitable.

Any business that might come under financial stress has a window of opportunity – the point at which something can be done to set it on the road to recovery, and where financial stress becomes distress, fend off insolvency. This might mean remedial action taken by management, such as releasing cash from working capital or other ‘self-help’ actions, but it’s not always possible to solve problems quietly and internally.

A financial restructuring transaction can make the difference between survival and insolvency. More often than not, the restructuring works – financing arrangements are renegotiated, new debt or equity is raised, or part of the assets or business are sold – but it’s a process that needs to be carefully handled. A business that could be heading for trouble is closely watched by investors, concerned suppliers, lenders, regulators and anyone else with a vested interest – and once financial restructuring is on the table, the different perspectives of third party stakeholders come into play.

Financial restructuring has sometimes been seen as the knell of doom for a troubled business but that’s not necessarily fair. At PwC we’ve helped businesses explore options that have helped them ride out tough times and recover strongly. That said, this is an unusual situation – stakeholders, and particularly lenders, have the same concerns and requirements that they would have in any recession, but layered on top of this in the COVID world may be a greater tendency towards caution because of the uncertain outlook and new questions over business health and viability.

That’s why businesses need to play close attention to stakeholder management in the coming months, whether they feel that financial restructuring is looking likely or not. It’s important in this environment that management is compelling in its communications with third party stakeholders but is also cognisant of the reality of the situation. Here are five essential tips:

  • Be alert to your situation. The corporate recovery curve is our depiction of the curve that maps the decline of a business if growth slips into underperformance, underperformance becomes distress and distress is then followed by crisis. At the nadir of the curve lies insolvency but relatively few will fall that low; businesses can and do stabilise and recover if the right action is taken at the right time. The risk is that management may miss the warning signs that the company is heading down the curve.
  • Act early. It’s critical that management acts towards the top of the curve, when it still has control and some room to manoeuvre – as the company slips down the curve, options begin to run out. Things can unravel quickly; contractual obligations are missed, financial covenants are breached. Once this happens, contractual protections kick in, external stakeholders gain the right to a seat at the table, and management loses control.
  • Take external advice. An independent but experienced perspective can be helpful. This doesn’t mean committing to any course of action, but is a way of fully exploring the company’s options. An independent eye will be able to challenge assumptions and point out issues that might have been missed.
  • Engage early and often. Good communication can create time and space to widen the company’s options, but stakeholder engagement needs a carefully thought-through strategy. You’ll need to determine in what order to approach key existing stakeholders, understand their objectives, consider new stakeholders (for example credit funds buying into the capital structure), and critically, understand what information each stakeholder group will need in order to make the decisions you are asking of them.
  • Keep on the front foot. It’s critical to maintain the confidence of your stakeholder group in order to stay in control of the situation. You need to be clear that plans are in place and action is being taken – for example, showing that the company is not in danger of running out of cash (or if it is that actions are underway to create a stable platform for the duration of the turnaround or restructuring discussions) and that a robust revised business plan has been prepared. And think ahead. Do you have the internal resources you need to run the day-to-day business and deal with the financial restructuring? Can you cope? If not, third party stakeholders might impose that help on you whether you want it or not.

Failing to manage key stakeholders effectively in the coming months could easily derail a recovery. But by remaining alert and mindful of any difficulties that the business faces, a well-prepared management team can reap the benefits of financial restructuring options and retain control of the company’s future.

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Gavin Stoner

Gavin Stoner

Partner, PwC United Kingdom

Tel: +44 (0)7801 255652