Case study: Over-leveraged production company

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We were approached by a large production company in a capital intensive industry that in recent years has made significant investments in replacing and upgrading its production capacity.  Unfortunately this co-incided with a slowdown in global demand for its products.  As a result, orders have declined and the company is currently making losses, although still cash positive before financing.

However, the profile of its debt was no longer appropriate for its cash flow generating capacity and the pressure to comply with the principal repayment schedules was causing increasing problems.  Essentially it was having to extend its payments to suppliers in order to come up with the capital to repay the banks.  In turn, suppliers were becoming more and more nervous, stopping deliveries and reducing the company’s credit limits.

At the start of the project we focused on both the stabilisation of the current position and planning the longer term measures that would enable the company to come out of the crises.  We analysed the long term strategy and competitive position of the business and confirmed that the business had very good prospects for the future, if it managed to survive the short term liquidity issues.  After we familiarised ourselves with the business we set up a rolling 13 week liquidity plan, which enabled the management to clearly communicate the company’s position to suppliers, customers and banks, and also to reassure the employees.

We believe that clear and open communication and the re-establishment of trust by delivering on all commitments made is key for the success of any restructuring situation.  In order to support the management and owners during this time we participated in all critical meetings that took place and were available around the clock to help to solve any issues that arose.

In terms of operational restructuring, we initiated a review of the number of people needed in administration based on the number of reoccurring tasks they have to perform on a daily basis. Through this analysis the management gained sufficient confidence to reduce the overhead in administration.  This increased the support of the production workers who had felt that their job security was partially being compromised due to the high expenditure on administration.

For the restructuring of the company’s financial liabilities we put together detailed monthly integrated financial projections for the next four years. By developing a fundable business plan based on realistic market driven assumptions the banks agreed to extend their loans and reinstalled the bank guarantees which the company needed for larger projects.

Six months after the start of the restructuring project the company managed to sell a non-core plot of land (as was envisaged in the business plan) and repaid a large part of its obligations towards the banks. In addition by proving that the company is able to survive on its own the owners are now in a position to look for a strategic partner and realise significant equity value where previously there was none.