The economic turmoil of the last six months and the availability of government-backed debt have put a focus on the sustainability of balance sheets. Unsustainable debt can affect the ability to trade in the short term, and in the longer term can have an impact on growth and investment.
A recent Osborne Clarke webinar considered the options that companies have to recapitalise and rebalance their balance sheets following the impact caused by the Covid-19 pandemic. Osborne Clarke experts Mark Wesker, Max Millington and Vicky Dudding were joined by James Austin of BGF and Ian Brown of Arrowpoint Advisory to discuss the opportunities available to businesses in the current climate and their experiences in the market over the past six months. Here are our top ten takeaways from that discussion:
1. Recapitalisation can be a positive step:
Recapitalisation is the umbrella term used to cover any steps or actions used to 'fix' the problem of too much debt. It is estimated that there will be around £70 billion of unsustainable debt held by businesses by the end of March 2021.
However, recapitalisation is an opportunity for all businesses, including those carrying more sustainable debt, to take stock and consider their ideal balance sheet structure.
2. Equity investment solutions:
Fresh equity investment from either existing shareholders of new shareholders will improve the debt:equity gearing or may allow for the refinancing of existing debt. Converting debt obligations into equity in the borrower, or even another company, may also be an option to remove or reduce a debt burden on the company.
3. Listed companies finding it easier?
2020 has demonstrated the relative ease with which listed companies have been able to raise money through the use of secondary fundraising. It was reported recently that companies listed on the AIM market had raised £2.8bn through secondary fundraisings during the first six months of the year.
4. Debt solutions:
Debt refinancing through new or existing lenders may help to stabilise a business through consolidating indebtedness and gaining certainty of financing for a post-Covid business case. Debt restructuring or debt buy-backs provide alternative solutions to reduce the debt burden of companies looking to regain control of their balance sheets.
5. Cash remains king:
The next six to twelve months will be uncertain and difficult to predict but having strong cash reserves will allow businesses to react to unforeseen financial challenges, as well as to take advantage of potential growth opportunities that would not arise under normal circumstances.
6. Seek out experts:
Investor experience shows that businesses that bring in appropriate senior expertise and additional management resource have the best chance to grow, regardless of their business or sector. It is also important to engage external expert help and experience where available, including from legal, tax, and debt/restructuring advisory perspectives.
7. No "silver bullet" solution:
There is no one-size-fits all answer to these challenges and therefore it is crucial to weigh up all of the options available and seek advice. In the current climate, positions and sentiments can change quickly so consider lining up 'insurance' options and strategies. Directors should be mindful of their duties in considering their options but businesses should not feel cornered if situations change.
8. Act promptly:
Be aware of your own bandwidth, but also that of other stakeholders including potential investors and banks. Early engagement will provide a greater range of options, allow the right discussions to take place and enable the best deals to be arranged.
9. The next six months will be crucial:
March 2021 is seen as a crunch point for many businesses, reflecting the timescales for the latest government restrictions and coinciding with key quarter dates. Businesses should be alert to important dates approaching and the potential impact to their balance sheet (and cashflow) positions.
10. Work with people you like!
Strong and constructive relationships with people brought in or external advisors will be essential. Some very difficult decisions and conversations will take place and positive relationships with those around you will help the process run smoothly.
You can read more discussion on recapitalisation options and points to consider on our website.