FD Foc Workout bankers
Any of the above will result in a significantly its structure, set about their tasks. Directors can become
'It was noticeable increased workload on the finance director and their
how the attacks team at a point when managing the day-to-day
business is already becoming more difficult. Costs will
were increasingly also increase sharply as such advisers are not cheap - a
situation exacerbated by the small pool of professionals
personal... some who have experience of previous recessions and
restructuring work.
ofthe bankers The finance team will need to explain in some detail
were very the cashflow forecasting processes, and the accuracy
of previous forecasts to actual outturns, so that those
aggressive and reviewing them understand how robust the results
are. This is important in determining the likelihood
really quite of additional funds being required in the short term
while longer-term solutions are being evaluated.
arrogant' Inaccurate previous cashflow forecast experience will
therefore be unhelpful, as the reviewers will conclude
that the forecasts are not reliable and that urgent
rather than more considered action needs to be taken.
This explains the need for high-quality cashflow
forecasts as mentioned above.
Financial covenants and downside scenarios will also
be examined to determine how robust the business is
if sales decline significantly (or other factors that drive
cash generation are adversely impacted).
Once the first phase of investigation is over then
protective or remedial actions will be formulated
and acted upon. This is very much dependent on
the situation but can range from restructuring debt
facilities (including debt-for-equity swaps, which
significantly dilute shareholders' interests), asset
disposal programmes, cost reduction and redundancies
and administration.
One major element in determining whether
administration needs to be considered is the potential
personal liability situation of the company directors
involved. Advice needs to be taken at an early stage,
especially where there is a risk of unlawful trading.
This can lead into very difficult judgmental areas where
it may not be absolutely clear that the company is able
to 'pay its debts as they fall due' but where a sound
recovery pian exists. The directors will need to ensure
they document their decisions at this delicate stage to
mitigate the risk of potential negligence claims. This
situation can obviously trigger conflict between the
executive and non-executive director groups on the
board if their judgments differ.
What can t expect if the company goes into
administration?
While the administrators will no doubt initially hope to
sell the businesses collectively or individually, closure
of certain parts may occur rapidly as the administrators
Oavid Tilston has been CFO of
seek to conserve cash.
three listed pics and has held
It is important to note that the administrators
senior finance roles in FTSE
are responsible for running the company, not the
100 and FTSE 250 groups. He is
directors (unless the administrators specifically seek
chairman of the audit committee
their services). This can lead to challenging situations
and a non-executive director of
depending on how the administrators, who are likely to
Sepura pk
have only a limited understanding of the business and
36
powerless in situations where the administrators are
in control and where the directors are not involved
directly in discussions with interested parties.
In addition, they may not be permitted by the
administrators to openly discuss with staff what is
going on to resolve current difficulties. This can be very
dispiriting for the directors involved and can also lead
to a loss of staff morale generally until some certainty of
what will happen emerges.
Personal reflections after the event
A number of individuals have, on an anonymous basis,
kindly recounted some of their experiences over the last
year of some of the difficult situations noted above and
of some of the conflicts that have arisen.
The role of credit insurers and credit insurance drying
up, particularly in the retail sector, was noted. This is a
difficult area to address as the company typically has no
direct relationship with the credit insurance community,
leading to frustration. 'There was nervousness in the
market, which led them to reduce cover on us initially.
This forced us to stretch our payment terms, which
led to a spiralling effect with the insurers further
reducing cover. This ultimately led to the credit insurers
withdrawing cover and precipitating a collapse as
suppliers demanded payments in advance that we
could not afford,'
Another individual observed how the working
relationships with banks became increasingly fraught
in the second half of 2008 as it became evident that
banks needed to shrink their balance sheets and reduce
their loan portfolios in response to subprime losses and
reduced capital bases. 'It was noticeable how the attacks
were increasingly personal later on in the year against
those trying to sort the situation out, going further than
just challenging the company position. Some of the
bankers were very aggressive and really quite arrogant.'
It was also suggested that, on occasions, the banks
involved did not wish to appoint administrators, but
that their intransigence in negotiations forced the
directors to appoint administrators rather than risk
personal liability arising from unlawful trading.
Perceived wisdom in the past has been for companies
to engage with their bankers (or equivalent) as soon
as financial problems were evident, 'I am not sure if
companies should be contacting banks earlier than
essential where the value of secured assets is sufficient
to pay down loans at present. In the current extreme
environment where banks need to shrink their loan
books their easy decision is to wind the company up so
they get their cash back and unsecured creditors and
employees are not taken account of. Maybe they would
take a different decision if they stood to lose money
on the loan and adopt a longer-term solution,' noted
one individual.
My recommendation would be to prepare for tougher
conditions now, as the difficulties faced by the retail,
property, housing and automotive sectors in 2008 will
undoubtedly spread to other sectors in 2009.
February 2009 accountancymagazine.com