Financial restructuring: A tool for corporate success

By Asia Securities Investment Banking

Commercial Bank CFO Nandika Buddhipala

Nithya Partners Founding Partner Naomal Goonerwardena

Asia Securities Investment Banking Co-Head Sharini Kulasinghe

Ambeon Holdings PLC Group Managing Director/CEO Murali Prakash

Financial restructuring is often perceived as an option for distressed companies seeking a lifeline in a turbulent environment. However, it can also be a strategic initiative to identify and benefit from un-tapped sources of value in your existing business. 

An eminent speaker panel featuring Commercial Bank CFO Nandika Buddhipala, Nithya Partners Founding Partner Naomal Goonerwardena, Asia Securities Investment Banking Co-Head Sharini Kulasinghe and Ambeon Holdings PLC Group Managing Director/CEO Murali Prakash expressed these views at knowledge-sharing webinar on deploying financial restructuring as a growth strategy. 

The webinar was organised by the Chamber Academy of the Ceylon Chamber of Commerce in collaboration with Asia Securities Investment Banking Team.

Uncertainty still prevails

While Sri Lankan companies have taken proactive measures to safeguard their liquidity post-COVID, a preliminary survey conducted by Asia Securities Investment Banking indicated that only ~30% obtained the required funding when they applied for fresh debt capital. In addition, ~40% of businesses indicated uncertainty about servicing their debt post moratorium. 

Commercial Bank CFO Nandika Buddhipala noted that due to the volatile environment, banks need to re-evaluate their clients’ business outlook frequently in order to provide a clear post moratorium solution. This indicates the need for virtually all organisations to consider some type of financial restructuring to ensure that the company is better equipped to deal with risks and threats.

Take proactive measures to avoid distress

Pandemic-induced economic uncertainty is not the only issue challenging companies today. Fast-moving markets coupled with outdated business models can also have a significant negative impact on business performance. Companies that take a proactive approach to strengthen their balance sheet, by periodically evaluating their financial position and eliminating financial inefficiencies, are likely to avoid financial distress. 

Ambeon Holdings’ Murali Prakash noted: “Very few companies are addressing financial restructuring. Most businesses do not realise that their balance sheet has a whole lot of money tied up in unwanted areas. Financial restructuring starts at home – how efficiently have you managed your assets and liabilities?”

Review and reorganise the capital structure 

Asia Securities’ Sharini Kulasinghe highlighted how healthy businesses may face a loss of capital due to an inefficient capital structure, noting: “Over the past few years, several companies have invested using debt, expecting rapid growth. However, they have not been able to capitalise on those opportunities, leading to an inefficient capital structure. The pandemic accentuated this situation which has resulted in deterioration in capital.” 

The panellists raised a number of different ideas for companies looking to optimise their balance sheets. Murali Prakash highlighted a variety of internal restructuring strategies, noting: “There are huge inefficiencies in companies’ working capital management such as overbuying [inventory], storage issues, wrong [purchase] prices and mismatches between supply chains. There are also inefficiencies in [working capital] timing such as mismatches between cash inflow from receivables and outflow from payables.”

He noted that addressing these issues could lead to significant improvements in a company’s liquidity position. 

Sharini Kulasinghe provided some insight on capital raising strategies, remarking: “On the asset’s side, companies need to evaluate what efficiencies they can get from redeploying capital on the balance sheet. For example, disposing of properties that are not well-utilised, divesting subsidiaries that the company doesn’t want to focus anymore, and securitising receivables can bring in more liquidity.”

Leverage legal provisions to support a financial restructuring 

Nithya Partners’ Naomal Goonewardena noted: “There are several provisions within the legal framework which have hardly been used … and this is the opportune time for that to be done.” 

For example, specific provisions allow the company to bind all its creditors in the negotiation process and reach an agreement sooner by obtaining majority votes of creditors. He also noted that a formal legal process would allow companies to carry out smooth negotiations with creditors.

Further, companies that cannot meet their financial obligations may face serious legal consequences. Specifically, there could be personal implications in conducting operations for a business that is heading towards financial distress. An early stage restructuring is, therefore, essential to reach an agreement with all the creditors to avoid the personal liability.

Approach the right investor at the right time

The value of a company is mainly determined by the value creation to a particular investor. Sharini Kulasinghe commented: “There is no standard way to look at valuation. Financial buyers look at investments largely from a returns perspective. They are currently discounting cash flows at a higher risk premium due to the uncertainty. For strategic investors, valuation is not determined by just by the cashflows of the target company, it is determined by the synergy potential between the two companies. Therefore, it is important to approach the right investor who can add the most value to the business.”

She also mentioned that while there are numerous investors interested in investing in companies during current conditions, successful execution depends on how the company can outline an attractive investment story.

Take a holistic approach to restructure your business

The panellists encouraged companies to look at restructuring in a comprehensive manner by reassessing the efficiency of the company’s liabilities as well as the assets that could lead to a profitable and resilient business over the long term. 

Companies often do not see financial restructuring as a viable tool for several reasons – including lack of awareness of the restructuring process, unfamiliarity related to legal and regulatory issues surrounding restructuring, inability to raise the required capital to support restructuring, and difficulty in engaging with banks to restructure debt. Engaging with an experienced advisor will help the company evaluate all available strategic alternatives and structure the most suitable and best value maximising restructuring solution.

The webinar drew participants from a wide range of industries including senior managers, directors, investors, and finance professionals – key stakeholders in any financial restructuring exercise.