Restructuring Mindset: A Broader Lens for the Pandemic’s Disruptions | Deloitte US has been saved
By: Kuttayan Annamalai, Kirk Blair, and Elias Tzavelis
In an economy upended by a pandemic, signs of distress are beginning to show. Big names in several hard-hit industries have already sought court protection, including Hertz in the travel sector, J. Crew and Neiman Marcus in retail, and Chesapeake Energy, the shale drilling pioneer. US bankruptcies are occurring at the fastest pace in more than a decade.1
Pandemic-related disruption of the business environment goes far beyond the obvious examples of companies that need protection from creditors. Almost every enterprise is being affected to some degree. Significant shifts in consumer behavior are creating new challenges—and in some cases, new opportunities—as are changes in workforce practices, supply chain strategy, financing options, tax rules, and much more.
Whether a company is facing a full-on reorganization or a need to recover and adapt in an evolving environment, it will likely benefit by viewing its future through a restructuring lens.
The underlying purpose of restructuring is to ensure that the assets and resources a company deploys are performing to their highest potential and fully meeting return expectations. That's the goal when a company seeks bankruptcy protection, which can be a valuable tool for making changes that cannot happen otherwise. A more effective use of resources can also be the objective in less distressed situations, however. Enhancing the performance of assets can be done across a spectrum of circumstances. In other words, restructuring, in the broadest sense of the term, should be a strong consideration for every business.
For an organization experiencing disruption, as most business are experiencing today due to the pandemic, the impact may be relatively fleeting and revenue may be starting to recover. Still, in such a situation, a company may want to refresh its go-to-market model, brand positioning, or other parts of its strategy. By their willingness to rethink the business, leadership may find new ways to thrive amid shifts in customer behaviors, supply chain disruptions, or changes in capital requirements or availability. Where impacts are lasting, there may be reasons to redesign specific business processes.
Changes in the economy have had a significant effect on working capital requirements for many businesses. For example, there may be questions that need to be asked about whether your receivables financing is optimal. A number of trends affecting the future of work also have clearly been accelerated in the pandemic, and many resilient companies should contemplate using the current disruption to rethink their workforce strategies. These are restructuring topics that any company experiencing some level of disruption may need to consider.
In the case of deeper challenges, a business may have found that its ability to bring its product or service to market has been threatened or interrupted by the pandemic. There may be a need to reset relationships, make big changes in the supply chain, or develop new customer marketing. There may be a need to rebalance the company's financial and tax condition, strengthen the balance sheet or make better use of available capital. A company may need to reconfigure its workforce.
In this grouping, the actions a company might weigh include those meant to put the enterprise on more solid financial footing—perhaps to avoid a distress situation in the future. If the balance sheet carries debt that could ultimately be difficult to service, the sooner the business takes steps to reset or reconfigure those obligations, the better; it may be time for an equity offering. Another option for a company that needs to shore up its finances is to reconfigure the business through a divestiture or, in some cases, a managed exit. There may also be opportunities for a company to monetize tax assets that have been languishing.
Some companies may reach a level of distress in which more difficult issues need to be addressed urgently. Should a company find itself in significant distress, it becomes vital to reconnect with shareholders and debt holders, along with other stakeholders such as employees and—certainly—customers. A company placed in distress due to the pandemic, or because of longer-term trends or missteps, may now have to reconstruct itself, and that includes making changes in capital structure. If successful, these steps should lead directly to a longer-term mandate to restore faith in the company and its purpose, with customers first and foremost but ultimately with all stakeholders.
When there's an imperative for a company to embrace a full reorganization by addressing the capital structure and renegotiating terms with existing debt holders and other creditors, then there also has to be a viable plan to restore the company to health. Any such plan or strategy needs to be seen as credible by the business's customers and, more importantly, potential new investors. Selling assets may well be part of the effort to raise capital and preserve the parts of the business that have the greatest value as a going concern.
A spectrum of circumstances
Understanding the levers that can be applied across the spectrum of business circumstances that are faced today can help every organization to embrace change and find opportunities, whether the disruption is mild or the distress is severe. Seeing circumstances clearly and weighing the available restructuring tools may even help a company to better understand where it lies on this spectrum—and anticipate what comes next.
1 Tayyeba Irum, Chris Hudgins, "U.S. Bankruptcies on Track to Hit 10-Year High as Pandemic Rages On, " S&P Global (August 10, 2020)
Kuttayan is a principal and leads Value Creation Services for Deloitte Consulting’s M&A practice. He focuses on leading clients through large-scale merger integrations and divestitures. In a career spanning more than 15 years, Kuttayan has led more than 40 global M&A transactions (including mergers, divestitures, carve-outs and spin-offs) and advises senior executives in developing integration and separation strategies, defining cost structures and operating models, managing M&A programs, planning for an issue-free Day 1, and realizing transaction value.
Kirk serves as a partner in Deloitte Financial Advisory Services LLP, and is the national practice area leader for Bankruptcy Accounting and Compliance services within the Turnaround & Restructuring of Deloitte Risk and Financial Advisory. In this capacity, he specializes in advising companies on court-required financial reporting while in Chapter 11 proceedings, managing the claim resolution process, and implementing emergence accounting requirements under Fresh Start Accounting guidance. His experience includes: Preparation of court required filings, such as the Schedule of Assets and Liabilities, the Statement of Financial Affairs, and the Monthly Operating Reports Serving as a claims management adviser in bankruptcy Fresh Start Accounting implementations for companies emerging from bankruptcy and execution of accounting for plan effects and Fresh Start adjustments Preparation of cash flow and operating projections Preparing/challenging business and reorganization plans Analysis of contract assumptions and rejections In addition to assisting numerous debtors, Kirk has also served unsecured creditors' committees, bank lenders, and other parties-in-interest in both formal bankruptcy proceedings and out-of-court restructurings, providing a full range of consulting services to clients across multiple industries. Publications and certifications Article on Fresh Start Accounting, co-authored with Tony Sasso and titled "Chapter 11 Sunny-side Up," was published in Business Finance Magazine in August 2008 Kirk is a certified public accountant (CPA) licensed in New Jersey, New York, and Idaho. He is also a member of the New Jersey State Society of Certified Public Accountants, the America Institute of Certified Public Accountants, the Turnaround Management Association, and the Association of Insolvency and Restructuring Advisors. Education BS, Syracuse University
Elias has more than 20 years of experience and is a Tax partner in the New York M&A Transaction Services practice. He advises financial and strategic clients on the tax aspects and structuring of taxable and tax-free transactions. These include mergers and acquisitions, stock and asset dispositions, restructurings, leveraged buyouts, spin-offs, public offerings, and joint ventures. He advises clients on domestic and cross-border transactions, and acquisition financings. In addition, Elias has extensive experience advising troubled businesses, both in and out of bankruptcy proceedings, and leads the Turnaround and Restructuring tax group. Elias is an attorney admitted to practice in New York and is a Certified Public Accountant in New York and Texas.