The 5R Framework for Turnaround Funding
11 Aug 2022
This is an extract of a larger article first published by the TMA, examining the role that ABL plays in the context of the five key phases of the turnaround journey, from reset, response, restructuring, and recovery to revival.
Reset. It is important to remember that all successful turnarounds still demand a viable business at the core, combined with an experienced management team with the skills, specialist advisory support, and key lender relationships to see it through. These businesses must work closely with their advisers to assess their current situation objectively with the benefit of an independent perspective.
Having identified the reasons for a profit downturn, the next task is to craft a robust recovery road map. During the reset phase, early sight of the business situation is paramount. Businesses that involve lenders at this stage increase the opportunity of effecting a successful turnaround, enabling them to arrest decline through a timely injection of working capital, securing the level of liquidity needed to drive financial and operational stability.
Response. An asset-based lender with relevant turnaround experience can outline the deal structure and map out the time-critical milestones through the transactional journey. In a restructuring situation, it is imperative to consider that cash generation and earnings may be limited, unpredictable, or even temporarily negative while losses are being addressed. Conversely, the balance sheet and asset base may be relatively strong and stable. Since an ABL facility is based on the combined values of a business’s assets, it is often well suited to a restructuring process, since it is not dependent upon the company’s existing profitability.
Restructure. Asset-based lenders provide capital to businesses in a variety of turnaround scenarios, from those that require a new capital structure to create stability while the business focuses on cost reduction, efficiency, and operational improvement, to those undergoing formal insolvency and others being acquired post-administration with strong ambitions for growth. In each case, lenders must look to optimise the quantum of funding by unlocking the value of all business assets, allowing the management team to stabilise the business quickly.
Recover. There is a fundamental recognition amongst the advisory community that business recovery occupies a very different space than either steady-state or fast-growth businesses. Nuanced turnaround lending experience therefore contributes to achieving successful outcomes.
Having created the deal structure, generating cash against a mix of asset classes (receivables, inventory, plant and machinery, and property) while reducing execution risk and expediting the deal at an intense pace is not only desirable but is also a prerequisite of the market. With turnarounds, the call for deliverability and speed is heightened since there is typically a narrow window in which positive deal outcomes can be achieved. Access to senior decision makers with the authority, accountability, and commitment to see the deal through and short lines of communication are therefore crucial, particularly when working across a variety of stakeholder groups, as is so often the case.
Revive. The creation of additional headroom post-transaction is essential to the revive phase. The ability to generate working capital via accounts receivable and inventory revolvers is a key component of generating business growth. A cash flow loan may also be available to augment an ABL facility, creating a hybrid deal structure designed to maximise liquidity in support of a turnaround to drive sustainable improvements, greater resilience, and rapid regrowth. It is also important to note that with an ABL facility there are fewer financial covenants required of the business when compared with traditional bank lending.
To read the full article, please click here.