Turnaround funding and financial restructuring
Financial restructuring or turnaround?
Financial restructuring is part of turnaround management, but the mistake is often made to merely restructure a distressed company.
To turn a distressed company around, it needs implementation of a turnaround strategy to fix the distressed company.
The fixing component is often neglected in restructuring plans approved by lenders.
For a discussion on the topic of restructuring vs. turnaround, see the article in the box on the right.
Funding requirements
The distressed company under turnaround management typically faces any of a number of financial issues:
- It requires funding to meet both its short-term commitments during emergency management, and to cover turnaround restructuring costs. This may include:
- Working capital for trade creditor and interest payments.
- Restructuring costs such as professional fees, closure and retrenchment costs.
- Investment in new technology and systems.
- The balance sheet has to be restored to solvency.
- Excessive gearing needs to be corrected.
A successful turnaround programme may often affect financial results on the operating profit or EBITDA level only.
This requires the capital structure to be aligned with the projected level of operating profit and cash flow to avoid interest charges keeping the company in the red.
- The debt structure represents excessive short-term and insufficient long-term debt.
Refinancing therefore involves not only the injection of new funds in the form of loan or equity finance, but also changing the existing capital structure per se.
Resolving turnaround funding
Internal funding:
- Working capital reduction
- Asset realisation
Existing funders:
- Re-term
- Standstill agreements and moratoria
- Debt/equity swaps
- Creditor agreements
New funders:
- Sale & leaseback
- Securitise income streams
- MBO
- Private equity
- Business rescue fund
Focus on internal turnaround funding first
A distressed company should first exhaust all possibilities for internal turnaround funding such as working capital reduction and asset realisation.
Public sector companies, and companies with benevolent shareholders or belonging to a strong group, can normally still rely on parent / group turnaround funding.
Failing this, it has no option but to find external funding.
Finding turnaround funding in the form of loan finance is difficult
Banks and other providers of loan capital invariably look for ways to safeguard and decrease rather than increase their exposure ("the first cut is the shallowest").
If a workout is deemed feasible, lenders may in some cases provide a measure of additional finance, but against unencumbered assets or surety. The latter is something the distressed company can seldom offer.
Lack of funding is a known and serious stumbling block preventing successful turnaround management. For more information see turnaround industry constraints.
Finding turnaround funding in the form of private equity funding is even more difficult
Given the difficulties associated with loan finance, private equity should be the logical answer.
The turnaround private equity market is well-developed overseas, but unfortunately not in South Africa.
While some SA private equity firms do invest in turnarounds, they do so in underperforming rather than in distressed companies.
CRS Turnaround identified a number of high net worth individuals and organisations that will invest in distressed companies on a case-by-case basis.
In addition, we are planning to launch our own R300m turnaround private equity fund.
Funding the turnaround is one of the greatest challenges faced by the turnaround practitioner.
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Turnaround or restructuring?
Turnaround or Restructuring? (Morris-Anderson) 
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Care should be taken that a turnaround is not limited to turnaround funding alone. Financial restructuring without an underlying turnaround plan will lead to turnaround failure.
Turnaround funding is not easy to come by. Lack of turnaround private equity funding is a major stumbling block in South Africa.
Resolving turnaround funding starts with internal funding, failing which existing funders and then new funders are approached.