Corporate Restructuring For Ailing Companies

Over the last five years in Kenya we have witnessed a number of companies both private and public become bankrupt or closed shop due one reason or the other. This is a situation that is replicated generally in Africa especially for state owned enterprises.

It is normal for any organization to go through good and bad economic times over its lifespan. During the occasional economic hardship companies may need to restructure its operations, liabilities etc in order for it to survive. Such restructuring is never easy and if not well executed may lead to bankruptcy and closure. Some organizations such as Kenya Airways popularly known as KQ, Mumias Sugar, and Uchumi are currently going through such a process of corporate restructuring.
The stakes are usually high given that failure is not an option; the very future of the company and its employees is at risk. Although each company’s restructuring process is unique, dependent on the company, industry, prevailing financial conditions, management team etc, there a few underlying principles that have to be taken into consideration:

Corporate restructuring should not be misconstrued to mean refinancing which is basically pumping more funds to an organization without addressing the root cause of the problem facing the company.  It’s important to note that refinancing may be part of corporate restructuring.

Restructuring will involve establishing processes, programs and frameworks that will enable a failing company regain profitability and become liquid to enable the company pay off its debts.

When the management team or any other person charged with restructuring; it’s important that they have the correct orientation in regard to profitability.  Focus must be put on economic profitability over accounting profitability. Economic profitability focuses on the company having free cash flow to pay off debts while accounting profitability may be misleading due to inherent principles such Accrual concept etc.

One great undoing for many managers handling a restructure is they do it as a ‘Business as Usual’. For example instead of improving sales in general (Which includes both Cash and Credit sales) they need to ensure that credit sale turnaround is shortened to ensure the company has free cash. Remember in accounting terms once the company makes a sale be it cash or credit it goes to the company profit and loss statement indicating profit although the cash has not been received hence creditors cannot be paid.

The management team needs to ensure it is adequately prepared for any negotiations with any of its stakeholders be it government, banks, shareholders etc. The management team needs to have a thorough understanding of the root causes of the problems they are facing and possible strategies and solutions.  It would be suicidal for management to walk blindly into negotiations.

Management need to think of specific requests as well as the guarantees they can offer, before negotiation with the banks even begins. During their preparations management can propose and determine how the possible refinancing is going to be distributed, under what conditions, and subject to what limits and guarantees.

Negotiating strategy and tactics should include identification of the negotiable points, possible counter-proposals from the banks, and matters kept in reserve to be raised during the process.

A company undertaking restructuring is at a very crucial point in its life as all eyes are focused on its every move. The company needs to ensure that it develops a consistent General strategy and most important communication.

For example, the company needs; to draw up a consistent and credible action plan to improve the company’s liquidity in the short, medium and long term, be realistic on its financing options. Such as financing short term needs with short terms funds, converting long term debt to equity.

It is important to ensure that the company acquires the services of qualified advisors who to a large extent determine the success of the restructure process.

Successful restructuring is a team effort.  Success requires that companies work closely with their investment partners. In a restructuring, investors are not only shareholders, but also supporting financial entities. For managers the challenge is always to be a step ahead by preparing well; to be transparent; and to communicate effectively.