Radical surgery essential for struggling SMEs
Irish SMEs are restructuring at very different paces and facing up to entirely different challenges depending on the extent of reshaping that is required.
For SMEs in Ireland, there are many variables at play depending on the sector, lender, business performance, and legacy trading and property debts within the business. All these impact the restructuring process. Some businesses need fairly radical action; others just need some light surgery. Increasingly, more businesses face very new challenges of seeking new sources of finance within a very short time period.
Most distressed SMEs are in need of some pretty radical surgery. That includes both operational restructuring of their businesses and also financial re-engineering of their balance sheets. This is needed to deal with a build-up of legacy debts that may include taxes, rates, trade creditors, rent and bank debt.
In many of these cases, a consensual restructuring process may not be viable give the range of creditors and a formal restructuring process may be required.
"Examinership lite" was introduced by the Government to facilitate restructuring of these distressed businesses and is a very welcome introduction. For borrowers who are tired of trying to just about keep their head above water, examinership is a means of bringing all issues to the table within the prescribed 100 day time frame. Examinership is successful for many business, and for those who do not make it through, directors often remark afterwards that at least it brought some finality to things and allows them to move on to do something else in true entrepreneurial spirit.
Many SMEs have performed heroics to survive over the last six to seven years. They adjusted very quickly to very difficult trading conditions, cutting their cloth accordingly.
Despite this, there are many SMEs who are performing very strongly but will never be in a position to repay legacy debts as a result of getting involved in property ventures or non-core activities.
Consensual restructuring is preferable in these cases. When the main issue on the balance sheet is bank debt, the financial institutions have become a lot more pragmatic. Solutions hammered out between banks and SMEs may include extending loan terms, adjusting interest rates, splitting the debt into core and non-core, zero rating some of the debt, and even writing off some of the debt in certain cases.
The key to a successful restructuring process is high quality financial information on the business, detailed projections, a profitable business model for the future and preparing a restructuring proposal that is workable for the lender in question. It is not a one-size-fits-all approach and this is where professional advisers should earn their corn, guiding businesses through what can be a very tricky process.
There is now also quite a large constituency of businesses whose lender may be in the process of exiting the Irish market and very quickly need to re-finance their loans.
In the same vein, some businesses may find their loans have been sold as part of a portfolio to a private equity fund which provides a very different dynamic to the traditional business banking relationship.
In both cases, the business will need to refinance their loans very quickly or raise fresh funds. In many cases, businesses may be able to source finance from an alternative debt providers at say 60pc-70pc of the security value. But there will still remain a significant equity gap that will need to be bridged.
Alternatively, by simply selling the security, it may realise a better result for the original lender. To date, this equity gap is being forded, in some cases, by family and friends, "mattress money" and other interesting sources. However, this is where equity injection is really required to facilitate efficient SME restructuring. The recent formation of an equity finance subgroup is a very welcome initiative by the Government and will hopefully come up with some practical solutions to address the difficulties faced by SMEs in securing equity finance.
Many SMEs need practical guidance on accessing sources of finance available in the market within a very short time frame, including from non-banking sources such as asset backed finance, the new Irish Strategic Investment Funds or dedicated private equity funds. An accelerated restructuring process in tandem with access to credit will allow businesses an opportunity to fully focus again on their core activities, growth and underlying profitability, which is in the benefit of all stakeholders.
Declan McDonald is Restructuring and Insolvency Partner, PwC www.pwc.ie