Primary drawbacks – entrepreneurs’ mentality and lenders’ lack of cooperation
Established in 2007 by three ex-bankers who pooled their know-how achieved in 15 years of banking, aimed at storming a niche of a market that was starting to shape up, Consilium Advisors launched earlier this year a debt restructuring service, crucial in a collapsing market.
The primary drawbacks to debt restructuring process are the entrepreneurs’ failure to acknowledge their problems and banks’ reluctance in accepting debt restructuring proposal.
Marian Urzica (photo), partner at Consilium Advisors outlined the “London Approach” concept designed by England in the early 90s, which treats the debt restructuring issue of a company in distress. It was successfully implemented when crisis hit Asia with the help of the central banks.
In Romania, however, banks showed reticence toward this concept, preferring to extend grace periods to the debtor, without expanding the process or making it more comprehensible.
“The key to success is the reorganization roadmap and negotiation with the creditors. Prevention is better than cure”, said Urzica.
Another problem many companies have to deal with when restructuring debt, is Romanians’ mentality. They are loath to acknowledge they’re in deep trouble.
“Companies want to do this, they actually need it, but they are reluctant to admit this. If banks start to restructure them, they will deem them as a buffer-stock, they will sell them as distressed assets and the market will be heading for the falls”, said Urzica.
Why are banks reluctant?
Banks’ reluctance to participate in a debt restructuring plan may stem from the fact that they have provided financing, without foreseeing the negative side and without assuming the worst case scenario of a recession.
“Last year, everything was ballooning in price, the easy credit led to a lending bonanza, disregard for possible major corrections. This is what triggered delays in this process at banks”, said Bogdan Nichisoiu, partner at Consilium Advisors.
We are completely disconnected to the past. Companies were borrowing on completely different backgrounds than today.
“The debt service needs to be reshaped, if the business is viable. That is the moment when we intervene to guarantee the viability of the business as to redefine it in order to stay afloat and continue its operations”, said Nichisoiu.
Practically, the pool of services offered by the company describes how engaged it is in the relation with the creditors and suppliers, without going ahead with a turnaround or a management restructuring.
Specialists say this is an extensive process that any manager can pursue.
“Is not easy to go and negotiate a restructuring of debts. You need assistance, a company due-diligence, a diagnosis and a comprehensive roadmap”, said Urzica.
Bridge between a business’ survival and collapse
“Crisis entails financial reshaping, restructuring or insolvency. The starting point is crisis, and the endpoint is survival or failure”, said Marian Urzica.
Restructuring is a survival scenario, he continued, which our companies and local banks should implement.
Real-estate area is not included in the company’s target, said Bogdan Nichisoiu.
“The visibility remains low for the coming years, especially in real estate sector. Generally, we are trying to synchronize with the market. It is an interesting niche, both for advisors and lawyers”, he explained.
The company had seven mandates in restructuring, 3 of them completed, and the remaining are in process.
“We didn’t plan for anything too large in volume, we didn’t have the human resources to pursue this. It is a generous market, the majority of our clients come from our network of affiliates, but we intend to stretch higher. For instance, construction companies face severe financial problems, why not try to present them our services”, Nichisoiu explained.
Legal restructuring – alternative to delayed processes
The delays in debt restructuring negotiation process with banks drags out the agony of the company. Advisors said they were working on a restructuring for three months with a bank that refuses to collaborate or negotiate.
“Completion of a restructuring process in three months it is a long time, especially if the parties are hesitant. The longer the process, the more painful it may be for the company”, said Urzica.
Therefore, they consider launching a new service – legal restructuring, voluntary alternative. In the event of a delay longer than 3 months, the debtor can prepare the groundwork for insolvency.
This will be carried only in the presence of financial advisors and specialized lawyers in this field of expertise.
What does financial restructuring involve?
Debt restructuring is a process used by a company facing financial distress in order to improve or restore its liquidity, based on an equitable evaluation of debt load to creditors.
Practically, the process means a reorganization of the cash flow, in the context of a changing economic environment. The optimum solution should include the regular payment of debt to the creditors, while the company continues its operations. Thus, it entails the reorganization of the borrowed capital, so as the creditors to be paid without the business to shut down.
The restructuring process reorganizes the operations and debt load of a company, but at the same time it will solve the core problems that put the company in peril.
The first stage in this process is the identification of the acute needs and essential problems. The next stage is due diligence, the complete evaluation of a company’s operations and assets.
Negotiation with creditor is the next stage. Advisors play a vital role in the process, as they bring their expertise and know-how in the company’s toil to find the best solution to stay in business.
After the company’s situation and financial problems are fully evaluated, it can begin identifying all the options available and hence start drawing the restructuring roadmap.
The endpoint is also the essential moment of the process. The restructuring is not "one size fits all". It is tailored and adjusted in order to meet the company’s needs and requirements, but taking into account the creditors accordingly.
In the assessment of operational performance, another element to be considered is the fact that the revenues don’t fully reflect the performance of the company. The change of statute, book debt, fixed-income assets are relevant elements to a business.
The effective implementation is the key-point in a restructuring as well as the most difficult part. Unforeseen drawbacks may arise throughout the process, which can result in major changes.
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