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With insolvency and restructuring dominating the Irish business landscape, Niamh Mac Sweeney examines market conditions in the wake of the financial crisis.

Insolvency and restructuring have been the subject of hard hitting headlines in the last 18 months and the majority of the coverage has not made for easy reading. Although the rate of corporate insolvency in Ireland fell for the third consecutive month in May, on an annual basis, however, the rate of insolvencies in the sector is 25% higher this year compared to the same period last year.

Figures released by InsolvencyJournal.ie, a website run by accountancy firm Kavanagh Fennell, show that 112 insolvencies were recorded in May, down 26% compared to 151 in February - the highest amount recorded in a month this year.

With corporate restructuring set to dominate the Irish economy and business landscape for the next few years it is important to examine the impact this is having on lenders, creditors, trading partners and employees alike.

According to Enda Gunnell, a partner with Mazars, the continued decline in activity levels arising from the recession is putting pressure on company cashflows and their ability to service debts and financing arrangements. "As the recession continues the better performing businesses are slowly being pulled into trouble by the length of time the current downturn is continuing." This he says is giving rise to a higher level of receiverships and insolvencies, something that is likely to continue.

Perhaps the most notable trend in recent months is the decrease in the number of companies availing of examinership. "This reflects the impact of the Courts raising the standard required before a company can enter and exit the process," says Doug Smith, partner at Eugene F. Collins. He does, however, point out that examinership remains a valuable rescue tool for the right candidates.

Michael Murphy, partner, and expert in insolvency and corporate rescue at McCann FitzGerald Solicitors says he has witnessed a marked increase in the number of receiverships, which is evidence of a more robust approach by banks to enforcements.

"This increased activity by banks is beginning to create a market for distressed assets, albeit at greatly reduced prices to those prevalent two to three years ago. The landmark cases involving the failed examinership of the Fleming and Carroll Groups has significantly raised the bar for examinerships. This in turn has led to a drop off in examinership applications," he says.

Financial restructuring and insolvency remain the most pertinent issues for the majority of Irish companies. How they react, respond and restructure will determine their road to recovery and their return to growth.

Communication is key

According to Smith, well managed businesses have resorted to the most important strategy - good communication. This involves talking to the banks, creditors, customers and staff. They also have tightened up on costs and credit management and although the results for those companies have been positive, each day is still a struggle.

Murphy agrees that communication is of paramount importance and directors should be fully aware of their duties and responsibilities to creditors and to employees. "Where a company is likely to find itself in financial difficulties, the board must carefully review the financial status of the company on an on-going basis," he says.

"Once insolvency becomes a real possibility, the duty of a director is to act in the interests of the company and its shareholders - a shift in favour of a duty to act in the interest of creditors." 

It's important to remember that directors' actions are liable to be assessed by a Court and in such circumstances inferences may be drawn as to why directors took particular actions or decisions at the relevant times. Therefore, directors should keep a detailed note of the commercial basis of decisions taken to be able to demonstrate, if necessary, the basis for their actions.

In terms of those companies who have successfully restructured, the business model going forward is a simpler one, with the main focus on core activities. "There is also an increased focus on cash generation and maximisation of cash as opposed to profitability, Gunnell says. "The real benefit having gone through a restructuring is the realignment of the level of debt to a size that the business can more comfortably deal with.

Martin Cole, director of Sentient Management, says that in his opinion there has been very little pure restructuring going on in the market. "The market is taken up with insolvency, mainly property driven, and this is not catering for the restructuring of cashflow businesses. There are many restructuring options open to companies which do not involve an insolvency process," he says.

Prompt action

There is no denying that reaction and response time are crucial and the timing for taking that action is of utmost importance - too little too late and it could be pointless.

"There is a point of no return in company insolvency," Smith warns. "It is common for directors of companies facing financial difficulties to bury their heads in the sand. The longer the directors wait before addressing a company's difficulties the less control they will have on the outcome and in addition, the prospect of a successful restructuring strategy is significantly reduced."

Gunnell advises directors to first get a detailed analysis of the current situation in terms of the drivers of revenue, costs (including the fixed and variable cost elements) and the generators and absorbers of cash.

This up-to-date and accurate information will allow management to consider the restructuring options available to them and to assess the impact of the options for both the business and the stakeholders.

He also warns that managers need to be realistic in terms of their assumptions and expectations of the restructuring process. "All options should be considered and there should be no sacred cows. The key issue is to recognise that the restructuring process requires action in addition to planning, because planning alone will not save a business."

Shareholders should set out clear objectives of what they would like to achieve and what would be acceptable in a restructured company. "There is no point trying to cling on to 100% equity when it is clear the only option for survival is the introduction of fresh equity," Cole argues.

Smith adds that communication is the best strategy. "Don't have your creditors guessing, and don't make promises to your creditors that you cannot keep. The directors must act responsibly and in the best interest of the creditors when a company faces financial difficulties."

It is important for company directors who are embarking on a restructuring process to make sure to consider all the options and to seek external advice from those who can help in identifying the options available and who can assist in evaluating the impact of various choices.

"It is important to act quickly in order to protect the intangible assets of the business such as its brand, customer goodwill, supplier relationships, key employees etc," Cole says. "The longer you delay in taking action the quicker the value of these assets is being eroded."

Smith adds that seeking expert advice is essential because, "An external restructuring manager has seen it all before but you have not. Objectivity is essential and subjectivity is potentially disastrous."

Restructuring options could include a sale of the business or a sale of the trade, a joint venture with a similar company, a merger, equity fundraising, a change of the business model and much more. Again a professional in the field of insolvency and restructuring will be in a better position to steer company directors in the right direction.

According to Gunnell with regard to costs: "All cost bases should be tackled from a zero based budgeting perspective. Costs should be reviewed to identify those that are absolutely necessary in the business rather than any ‘nice to haves'.

"The drivers of cost, or those business items that give rise to costs, should be fully understood. All historical pricing norms should be challenged."

Cashflow management remains a big challenge for many businesses and there are a number of key measures that can be incorporated to improve liquidity. "It should start off with a written cashflow cycle detailing from the minute it orders stock to the point it gets paid," Cole explains.

"Most people will be shocked by the average length this might be. Measure the cycle in days and then take each constituent part and explore ways to do it differently. For example instead of holding your own stock, hold consignment stock which you only pay for once it's sold. Get customers to pay deposits or progress payments and negotiate improved payment terms with suppliers."

Widen the focus

Although immediate focus will most likely be on cost reduction and cashflow management there are other imperatives that must be addressed in a comprehensive restructuring plan.

As part of a restructuring plan the entire business model of the company should be considered. Should you change from distributor to agent? Should you sell more online?  Should you outsource your back office activities in the new restructured company? Companies, in particular those that may have been around for a long time, should use the opportunity to take a look at all aspects of their business.

Understanding your business strategy, core business propositions and identifying the unique features the business brings to its marketplace is fundamental.

According to Gunnell it is essential to know the needs and wants of your customer base, today and into the future. Consideration should be given to the optimal ways of serving these requirements using technology or other efficiency enhancing mechanisms.

Companies that successfully restructure should be in a position to compete more effectively in the current market as they will have eliminated a lot of the dead weight from their organisations. Their cost base should put them at a significant advantage to other companies when the recession lifts.

Companies which restructure now will be in excellent shape to capitalise on the upturn. These lean enterprises will have manageable levels of debt, extremely focused management teams and the restructuring exercise will have provided them with a renewed energy and a hunger to survive. 

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