The growing focus on business turnaround
The restructuring market has evolved over the last few years shifting to an investment and turnaround ethos. Much of this has been encouraged by the growth in turnaround funds and a growing appetite to invest in such situations rather than rely on traditional asset realisation processes. Other ownership strategies such as the “loan to own” approach have also gained favour.
Restructuring advisers are also being called in by distressed businesses at a much earlier stage as stakeholders have become more skilled at identifying underperforming investments and are subsequently pursuing a wider range of restructuring options sooner.
The range of work carried out by restructuring advisers has also broadened and now encompasses a full range of corporate finance services including acquisitions and disposals, transaction due diligence, debt and equity re-financings, pensions deficit solutions and strategic, operational and financial reviews.
The 26-strong restructuring team at Ernst & Young in Leeds has a breadth of experience working with a range of businesses from FTSE 100 companies to owner managed businesses. Over the last year the Leeds team has continued to broaden the range of its advisory abilities - highlights have been providing advice to pension trustees in several FTSE 100 transactions and continuing to play a leading role in assisting a number of the region's public sector healthcare trusts to put restructuring plans into practice.
Restructuring partner Hunter Kelly at Ernst & Young in Leeds said: “Where assistance has been sought early enough we have had considerable success in transforming underperforming businesses in many ways including operational improvements, working capital reduction and overhead efficiency gains.”
“There is still a healthy appetite amongst the asset-based lenders and turnaround funds to invest and transform under-performing companies rather than simply rely on traditional insolvencies to “phoenix” the underlying business.”
Turnaround options
The turnaround era has evolved with investors now facing the pressure of growing in a highly competitive market. The local appetite for turnarounds has been demonstrated by the success of Endless LLP, a fund launched in December 2005 by Garry Wilson, a former partner at Ernst & Young, to provide investment for talented management teams to realise a businesses potential. Inevitably many turnaround and re-financing situations require a strengthening of the management team and Ernst & Young have frequently turned to Interim Partners to assist in this process.
Hunter continues: “The movement of the market from traditional insolvency mechanisms has enabled us to apply a wider thinking to underperforming businesses and offer an integrated corporate finance approach to clients.
“We have seen a marked increase in what we call 'accelerated disposals and acquisitions' activity and re-financing opportunities, as well as witnessing the growth of debt trading from the London market into the regional markets.”
Accelerated Disposals and Acquisitions is an intensive deal process designed to achieve the sale of all or part of underperforming companies as an exit for lenders or shareholders. This has emerged as a key process for enhancing the position of creditors and ensuring that the financial impact on the region is less severe than would be the case in a traditional insolvency.
Re-financing has also been a growth area where we have had a number of successes in negotiating more flexible funding packages that “fit the business model” where the incumbent financers have said no. Indeed, the business does not need to be profitable to get access to more cash, albeit the structure of such packages is important to give stability to implant growth and profit improvement plans.
Charles King, a restructuring director at Ernst & Young adds: “Turnarounds do not just involve transforming loss-making businesses to profitability. We are increasingly working with companies which, whilst under-performing, have remained profitable. Often we are able to bring a suite of solutions all of which play their part in improving business performance.”
One such example is a transaction worked on by Ernst & Young last year which involved implementing a range of solutions including:
- a review of the business to identify the issues and propose solutions
- immediate stabilisation of a short term cash flow crisis, including the installation of an interim cash flow manager
- recruitment of a finance director through Interim Partners to strengthen the finance function
- building a forecasting model and revising the financial forecasts to provide a credible business plan
- developing a new funding structure more suited to the business needs
- identifying potential funders who could provide the required facility structure, and
- project managing the entire process
“In this case, the strengthening of the finance function was crucial to build confidence with an incoming funder. Once this had been achieved the structure of the funding package was critical and ultimately made the difference between constraining the business and providing it with the headroom it needed to develop.” added Charles. Hands on assistance
“Gone are the days of merely providing advice and walking away,” said Taylor Dewar, a restructuring director at Ernst & Young. “The market is now demanding that advisers provide hands on assistance to ensure the delivery of plans and this is where we need dedicated interim managers with the right level of experience and people skills.”
With business stakeholders calling in proactive advice at an earlier stage, an increase in the number of restructuring and funding options available to distressed businesses and a more creative approach from skilled advisors, the turnaround era presents a positive time for businesses that now have a greater chance of surviving difficult times.
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Hunter Kelley,
Restructuring Partner,
Ernst & Young -
Charles King,
Restructuring Director,
Ernst & Young -
Taylor Dewar,
Restructuring Director,
Ernst & Young