Strategic Transaction Assessment in an Era of Uncertainty
Regardless of the “trip wire,” it is critical for companies and their boards to develop options and optionality at the earliest sign of (di)stress.
There is no shortage of factors that continue to put pressure on a company’s ability to successfully operate its business and service its capital structure, let alone pursue initiatives to propel it to the next phase of growth. Whether through protectionist trade policies, supply chain disruption, labor retention issues or accelerated technological transformation, rising input costs are continuing to compress operating margins. The Federal Reserve has also recently indicated a hiatus on potential future rate cuts due to persisting inflation. Against this backdrop of economic uncertainty, consumer confidence registered its largest monthly drop in almost four years. The combination of declining growth, profitability erosion and prolonged elevated borrowing costs is creating a complex and challenging environment for businesses to navigate.
In some cases, financial covenant violations under a credit agreement may set the stage for an intervention between a company and its lenders prior to a default. In other cases, long-simmering stressors can quickly turn into acute problems – such as the inability to pay vendors, make interest payments or refinance maturing debt – and put a company’s stakeholders at significant risk of losing control and/or permanent value diminution.
Set Objectives and Play Offense
A company will do much better when it is proactive in addressing capital structure problems, as opposed to “playing defense” with lenders or being completely beholden to last-ditch (and likely subpar) alternatives. When doing so, it is integral for the company to set clear objectives at the onset. For example, if a company is running uncomfortably low on liquidity, the guiding objectives could be to seek relief on the best possible terms with minimal disruption to the business while preserving value for shareholders. A strategy can then be crafted and implemented to ensure the achievement of these objectives (with tactics being adopted to effectively drive the strategy).
Develop a Credible Business Plan
A thorough analysis must be undertaken by the company and its advisors to determine the root causes of stress and assemble a remediation plan that details the corrective actions that have been (or will be) taken. The timing and costs of the plan’s implementation should be reflected in the company’s profitability and cash flow forecasts, along with other potential growth opportunities that can be quantified. This analysis will form the basis of the business plan, which will ultimately determine the transaction options that support the long-term sustainability of the company from a capital structure perspective.
The strategic assessment will set the stage for a fresh re-evaluation of the company’s business, valuation potential and relationship to its capital structure.
A strong leadership team tasked with executing the plan will be essential for the story to be received by the market with credibility and conviction.
Explore Multiple Strategic Alternatives
There is a wide spectrum of transactions that can potentially serve as solutions to festering capital structure issues, which can include capital raising, mergers and acquisitions (“M&A”) alternatives, balance sheet restructuring, or some combination thereof. Depending on the situation, these alternatives can be pursued alone or in combination with each other (as opposed to being mutually exclusive).
The company and its investment bankers must analyze each potential alternative, including its impact on business operations, enterprise valuation and stakeholder treatment.
Financing options may include new debt, equity or structured capital to refinance existing debt, recapitalize the company and/or provide incremental liquidity.
M&A alternatives may include the sale of the entire company, business units or identified assets, the proceeds of which can be used to pay down existing debt, provide incremental liquidity and/or serve as an exit for ownership.
Restructuring existing debt may include an interest rate adjustment, maturity extension and/or equity conversion, among other things (including uptier and drop-down transactions).
If a company is seeking short-term relief from its existing lenders, it may negotiate a temporary waiver of financial covenants, payment-in-kind interest and/or access to additional capacity under its credit facility.
Maintain Optionality & Agility
To be in the greatest position of strength under challenging circumstances, a company must evaluate, and perhaps pursue, multiple transaction alternatives concurrently. This approach will be necessary to maintain competitive tension between all parties at the table – including current stakeholders, new capital providers and/or prospective buyers – and yield the best possible outcome.
Investment bankers that specialize in capital structure advisory can help companies design a bespoke process, implement the desired transaction(s) and drive all parties towards a global resolution.
Understanding the dynamics of each alternative will provide insight into the motivational drivers of the key stakeholders, the negotiating leverage of the company and the degree of difficulty in successfully consummating a particular deal.
Process constraints, such as dwindling liquidity or a “maturity wall,” may allow only a very limited window to find and implement a transaction. As these situations tend to be necessarily fluid, the company and its advisors must be nimble when both crafting and executing their game plans
The Special Situations Investment Banking team at CriticalPoint has a 20-year track record of successfully formulating, sourcing and executing creative transaction solutions for companies and their stakeholders in storied, complex and distressed situations. If you are looking for independent advice during a period of financial uncertainty, please let us know how CriticalPoint can help support your objectives.
Written By:
Managing Director, Special Situations
About CriticalPoint
Headquartered in Los Angeles, CriticalPoint is a leading full-service financial M&A firm that uniquely combines the best of investment banking, private capital, and valuation service offerings. CriticalPoint executes, sources, and invests in deals across a wide variety of industries for the traditionally underserved middle market. Since our founding in 2012, our mission has been to serve the needs of owners, entrepreneurs, management teams, and stakeholders with our experience, knowledge, and expert judgment, to help them realize their companies’ greatest potential. From our deep-rooted foundation in private equity and investment banking, and our devotion to deal origination and business development, combined with being entrepreneurs at heart, we believe we are differentiated and well positioned to help companies wherever they are in their life cycle.
