Columnist

All Along The Watch Tower - If There’s Trouble Ahead

The UK economy has slowed with the greatest reduction in the service, information, communication and wholesale, retail and motor trade sectors. For instance in May growth in the UK service sector slowed to 0.3 per cent as compared with 0.8 per cent growth in the three months ended August 2018. This slowdown could be a harbinger of recession, although this is notoriously difficult to predict. As of 1 July, the U.S. economy set a new record for the number of consecutive months without a recession - 121 consecutive months of growth. However, expansionary periods end. Trade war escalation will impact economies globally. In most large economies, Central Banks have undertaken a gradual reversal of quantitative easing policies with fresh liquidity being injected. If a recession comes, there are fewer stimulus levers available as compared with the position in 2008.

When the economic warning signs are flashing, companies must be on guard and alert to potential signs of trouble in their own back garden. At James Stocks & Co we have access to funders with appetite to work with business to prepare for uncertainty and the opportunities that follow.

Being alert means checking for signs of customer or supplier distress - the regular payer stretching credit terms or delays in receiving supplies, or requests by suppliers for early payment. If unsolicited calls from organisations keen to offer finance dry-up, this is a warning signal.

Today, reviewing financing agreements is important - are loan-to-value covenants included in such agreements? What is the likely impact on these covenants if there is a downturn in trade, a fall in profitability or asset write-downs? Are there any exchange rate implications in such agreements arising from the low value of the £?

Thinking about strategic choices is important - what is your business famous for and therefore what is the USP. Has the business moved away from a focus on its core? Are some of the underlying value drivers of the business under stress? Is now the time to focus on the high margin core business and reinforce customer value by investing in and enhancing the business which has always done best?

Be careful not to try and “acquire” out of trouble. Buying a business because it seems a solution to a looming problem is not a sure way to escape trouble. Research in Motion (Blackberry) in order to catch-up with the rapid move of consumers away from slow moving corporate technology was, too late, forced into an acquisition of a company owning a mobile software platform.

If, despite being alert, a business becomes stressed, then there are several avenues to follow.

In no order the following steps should be considered:-

• Shortening the working capital life cycle - what steps can be taken to turn finished good stock or work-in-progress into cash? How can payment cycles be improved?

• A human resource review to understand the costs of down-sizing the workforce and the focus of such reductions;

• What other costs can be reduced - a rent free period whilst cash strategies are implemented or understanding contractual rights as regards suppliers;

• Work with advisers on a strategic and refinancing plan for the business. Should it be required by funders it can then be produced at short notice; and

• Consider whether part of a business can be sold or whether a merger with a competitor is possible.

If the situation worsens then pursue the following:-

• Refinancing options - special situation funds are not only the preserve of large corporates. There are funds ready to deploy capital into SMEs. Appoint advisers who can lead the Board through the investment process and suggest/recommend funding options. At James Stocks & Co we have market intelligence regarding investor appetite and available liquidity of funds;

• Discuss with existing funders whether they would be prepared to fund a turnaround or fund a bridge to a refinancing with a new funder, e.g. special situations fund. Having a turnaround plan on the shelf is important as it expedites such discussions;

• Establish an online data room so due diligence can be underway at short notice;

• Prepare a complete schedule of charge holders, together with a narrative setting out the rights of each and how these rights apply between the charge holders and creditors. This will be important when considering who needs to be approached and in what order; and

• Consider, if required, a consensual creditor rescheduling against an agreed turnaround plan. Where there are many creditors this may need to be implemented by way of a Creditor Voluntary Arrangement or CVA (an Individual Voluntary Arrangement for a sole trader or the self-employed).

A CVA requires a plan to be put to creditors which must be approved by creditors representing 75 per cent of the total indebtedness. However, such a re-structuring is likely to be a breach of funding arrangements with existing funders who must be consulted.

At James Stocks & Co we have a team with experience of advising companies in special situations. This includes both legal and investment banking expertise. Added to this is our market intelligence of funds and alternative lenders with appetite to support business through these complex situations. If you would like to know more we would be pleased to hear from you at t.stocks@jamesstocks.com or m.ellegaard@jamesstocks.com

James Stocks & Co - Action Template for Success

• Move quickly
• Understand existing funding terms and rights of charge holders
• Develop a plan
• Set-up an online data room
• Create consensus
• Communicate and manage expectations of all stakeholders

This was posted in Bdaily's Members' News section by James Stocks .