Capital and debt restructuring processes can achieve a great deal and solve a lot of issues. But it’s possible that other more formal restructuring processes will be required as well - especially if there are more stakeholders than it’s possible to engage with or greater cost savings are needed to ensure survival.
Some of the things a capital and debt restructuring can achieve include:
- reduction in debt repayments to a level more appropriate with revised EBITDA;
- loan note reductions or capitalisation
- incentivisation for management teams;
- revised debt levels or extensions;
- upside instruments for all stakeholders; and
- revised covenants.
However, if there are other key challenges faced by the business which may be more fundamental, you might need to consider other restructuring solutions - either alongside or instead of the capital and debt restructuring.
These are likely to include:
Company Voluntary Arrangement (CVA)
A CVA is a flexible restructuring tool that allows a company to make an arrangement with its unsecured creditors for payment over a prolonged period, and potentially at a reduced level. This is a formal process where creditors are required to vote and 75 per cent (by value of debt) of those who vote must vote in favour for it to be accepted - 50 per cent by value of those voting in favour must be unconnected parties. Once passed, all unsecured creditors are bound by the terms.
The benefits of a CVA can be significant as it can reduce liabilities, reduce payments and allow time for the business to recover. There are downsides too, such as that it can reduce recommended credit limits and credit insurance limits, but these are usually manageable.
Pre-packaged administration (pre-pack)
A pre-pack is a formal insolvency process that is predicated with an accelerated sales process to test the market widely for buyers for the business. The sale negotiation and documentation are agreed before the formal insolvency (administration) and only become ‘live’ once the company goes into administration.
The sales process is often truncated and the most likely buyer is the existing management team, who can effectively start again the very next day having left creditors behind. Despite criticism from the press, pre-packs remain a key restructuring tool. In the right circumstances, and done in accordance with all the relevant insolvency guidelines, they save jobs and allow the business to continue with much reduced liabilities.
This is a recently introduced solution akin to a CVA or Scheme of Arrangement (Chapter 11 in the USA). However, a restructuring plan could offer an alternative to a CVA as it can include secured creditors, and force some creditors to accept the plan via a court-endorsed ‘cross class cram down’ procedure. This may initially be relatively expensive and the preserve of larger businesses, but there ought to be some trickle down to the middle market as the process becomes more established.
Whichever solution you adopt, it’s important that you are properly advised and that the specifics are tailored to your individual circumstances.