The brave new world of restructuring

Economic uncertainty is not the only issue challenging companies today. Fast-moving markets and competition from non-traditional sources are taking a toll, too. For companies with entrenched or outdated business models, these trends raise the spectre of business failure. Even profitable companies are not immune. As it becomes harder to hit performance targets, virtually all organizations need to consider some type of restructuring.

If this sounds radical, it’s likely due to the negative connotations associated with restructuring. For most people, restructuring conjures up images of court-supervised negotiations with different classes of creditors trying to reach some form of consensus. But when viewed more broadly, restructuring represents an opportunity for companies to examine their operating models with the ultimate goal of optimizing their business for the long term.

Seek out ways to improve performance
Companies recognized for management excellence, innovation and agility are those that regularly review their business models, renew their market approaches and revise their operations to sustain growth. While this encompasses diverse approaches, there are some common performance improvement practices that every company can apply:

• Improve your performance on a regular basis. Identify areas of underperformance, analyze available options and adopt strategies to enhance operations
• Evaluate critical market trends and events. Use your findings to inform decision-making
• Maintain a strong cash position. Optimize your receivables, payables, inventory and other forms of working capital
• Maximize the value of your portfolios. Arrange and structure your debt and capital requirements to maximize value while managing risk

The success of these performance improvement practices hinges on a company’s ability to engage in robust scenario planning on a regular basis. In fact, scenario planning during good economic times can help ensure survival when markets take a turn for the worse — something that was amply demonstrated by the global financial crisis. Distressed companies in such industries as automotive and forestry, for example, have had to confront systemic issues in their business models. This explains why some of the world’s governments are requiring companies to change their business plans before advancing any bailouts.

Simply put, the bottom line in these restructurings is the bottom line. While a struggling company can negotiate with creditors to re-engineer its balance sheets, the success of such negotiations is determined by the company’s ability to reorganize its operations sufficiently to sustain long-term profitability.

The brave new world of restructuring
During previous periods of economic decline, it was common practice for distressed companies to initiate a formal restructuring filing as the first step in reorganizing the business. How things have changed. Today, various stakeholders — whether financial backers, customers, suppliers or employees — are increasingly willing to negotiate outside of a formal restructuring process. This demonstrates the need for companies to take action at the first signs of distress.

Ideally, this brave new world of restructuring begins at the operational level: management must identify, implement and communicate the strategic direction being pursued. Companies in danger of defaulting on a single large loan obligation may be able to negotiate an informal arrangement with their primary creditor — and avoid formal proceedings. Similarly, solvent corporations that are having difficulty refinancing their loans or meeting onerous debt covenants can take steps to preserve enterprise value by seeking to restructure under the relatively favourable terms of the Canada Business Corporation Act (CBCA).

If companies tackle these issues on multiple fronts, they improve their chances of not only surviving a downturn, but also of thriving when the economy recovers. To facilitate a smooth and efficient restructuring, companies may want to work with specialists who can help them reorganize their operations, strengthen their capital structures, identify opportunities for performance improvement and, if necessary, file for bankruptcy protection as part of a well-thought-out restructuring plan.