By Sam Tao, Partner, Refinancing and Restructuring, PwC
As a business, the road ahead can seem unpredictable. Having demonstrated your strength and resilience during the pandemic, you might have come into 2022 with renewed prospects for growth. But now you face a fresh set of headwinds, ranging from soaring energy costs to fragile consumer confidence. These challenges can be compounded by the overhang of rent arrears, stretched creditors, deferred pension payments, upcoming debt maturities and other financial demands that are now becoming due. Government research highlights both the extent of additional debt built up since 2019 and the high proportion of income needed to service it.
Where do you go from here?
While waiting until the storm has passed might seem tempting, it isn’t an option. Built up liabilities will need to be addressed.
You also need to sustain investment to keep pace with markets being transformed by digital transformation, changing customer expectations and the shift to net zero.
While this can all seem daunting, I don’t want to paint a picture that’s all bleakness and no light. Far from it. There are opportunities opening up in today’s fast-changing markets. The big question is how can your business best prepare for the threats, while proactively capitalising on opportunities?
This is where deleveraging, financial restructuring and other aspects of balance sheet optimisation can prove so useful.
By proactively dealing with its liabilities and assessing financing options, businesses strengthen their resilience in the face of market uncertainty by ensuring that they can meet payments as they fall due and are adequately capitalised. But balance sheet optimisation isn’t just a defensive measure. The financial flexibility allows you to refocus funds on areas of maximum value potential, move in quickly on opportunities and pivot for growth as market conditions become more favourable.
However, balance sheet optimisation is a complex process that requires insight and care in delivering business objectives while managing emerging risks and meeting different stakeholder demands. Four key priorities stand out:
The starting point for balance sheet optimisation is a clear and robust business plan that aligns your strategic objectives with the risks and opportunities within today’s business landscape. Key inputs include an assessment of the strengths and weaknesses within your balance sheet, capital structure and cash flow, and scenario analyses to gauge the impact of potential risks, their impacts and how to mitigate them.
With your business plan in place, you can assess the available financial options and begin negotiations with key stakeholders such as lenders, landlords and pension trustees. As pressure from creditors increases and finance becomes harder to secure, it’s important to take a proactive approach to refinancing, restructuring and addressing liabilities. This includes securing consensual terms with individual creditors and coming to an agreement with all creditors in an organised way on your terms.
It’s important to make sure that your balance sheet isn’t hindering growth and is resilient enough to withstand the uncertainties ahead. Adopting a proactive approach to dealing with over-indebtedness and addressing other balance sheet liabilities will help to maximise options and flexibility. This may involve the need to use formal restructuring tools.
While it might seem counterintuitive, preparing for growth and optimising your balance sheet might be just as effectively achieved by raising more funds. Exploring new ways to refinance your business or finance strategic priorities may also be beneficial.
For example, sustainability-linked financing is becoming available to fund green transition and to further other environmental, social and governance (ESG) priorities.
So, while balance sheet optimisation is always valuable, it can be especially critical in an environment that is marked by exceptional uncertainty with both threats and opportunities presented in equal measure. Effective optimisation can boost your financial resilience and options, while positioning your business for long-term growth.