FINANCIAL restructuring is perceived to be a key tool for Malaysian businesses to recover and improve profitability in the immediate term as the world prepares for post-pandemic conditions.
Based on a recent live poll conducted during an EY webinar titled ‘Turnaround and Restructuring: The Banker’s Perspective’, 77% of the respondents believes that business profitability is expected to improve in the next 12 months, but it is unlikely to reach pre-Covid-19 levels.
The findings also showed that 77% of the respondents recognise the need to fundamentally change their business model to reflect current market environments.
Meanwhile, 68% of the respondents believe that Malaysian businesses should prioritise on costs and revenue optimisation in order to manage business and debt obligations in the near future.
Additionally, nearly half (43%) of the respondents do not think the debt level they are carrying is sustainable. This suggests that businesses may need to restructure their debts once the loan moratorium ends.
“The government initiated a number of stimulus packages and relief measures such as the loan moratorium to support businesses during challenging times,” EY Turnaround and Restructuring Strategy senior executive director Khoo Poh Poh said in a statement released today.
“However, as some of the measures come to an end, there are clear concerns as to whether some of the borrowers would still be able to meet their obligations then,” he added.
As some businesses embark on a financial restructuring route, some may need to recapitalise their businesses through a ‘white knight’ participation, with a focus on new business models and operational turnarounds.
A ‘white knight’ is a company or individual that acquires a target company that is close to being taken over, which is why some of the respondents may prefer to retain control via ‘self-rescues’.
“A white knight is necessary when the business is operating in a weaker sector that requires new monies and business to recapitalise its business. In some cases, white knights could also bring in new competencies and skills to complement existing management,” EY Solutions LLP strategy and operations partner Sriram Changali.
“However, there are downsides when a white knight is involved in a financial restructuring exercise. To ensure the white knight’s investment is commercially viable, the existing shareholders and creditors tend to take higher haircuts and experience lower returns,” he added.
Khoo also mentioned that banks are in a position to support self-rescues, provided the business can demonstrate that it is viable.
“However, self-rescues also present challenges when it comes to whether management has the resources and skills to execute the turnaround and ensure a successful restructuring,” he said.
Regardless of whether local businesses will take the white knight or self-rescue route, financial restructuring is dependent on the financial forecast of a business. This, in turn, determines the level of debt that the business can afford.
As the market environment remains uncertain and volatile, the accuracy of any financial forecasting becomes challenging, impacting the ability of businesses to restructure their debts effectively.
On that note, Sriram believes that the key to developing sound financial restructuring is to have robustly designed scenario planning and determine appropriate mechanics, triggers and resources that can mitigate the risk of a post-restructuring default.
“Financials restructuring is not only dependent on a business’ financial projections. It is also driven by the design of the recourse or the mechanics to manage forecast risks and defaults,” he said.
“A well-designed mechanism should be able to close any gaps in the forecast by automatically converting the shortfalls to ordinary shares or equity-related instruments to effectively negate any future risk of default,” he added. – Sept 25, 2020
