30 May 2018
Refinancing processes: value added by a financial advisor
Despite quite a few years having passed since the onset of the financial crisis, and although it is true that the worst of the crisis has already passed, the truth is that recovery is being slower than envisaged in some sectors, especially in those in which the domestic market is the main or even only one.
In view of a scenario such as the one at hand, with clear recovery but with uncertainty, it is possible that difficulties might appear again in companies for dealing with debt service, perhaps because grace periods conclude and sales have not performed as foreseen. The solution is to obtain a refinancing agreement on the basis of a new business plan, providing there is still confidence in the viability of the company.
The alternative to the refinancing is insolvency, and this is mostly a step prior to the liquidation of the company. In this sense, the reform of the Insolvency Act, even though it could have been more ambitious in its objectives and proposals, is a move in the right direction on helping “pre-insolvency” refinancing agreements to be achieved, reducing the majority needed to the group of entities holding 75% of the debt. In view of this risk, refinancing arises as a necessary tool for avoiding it to the benefit of all the parties affected.
The basic objective of the refinancing is to reduce, to the extent necessary, any cash outflows aimed at financial debt service until the business activity consolidates its recovery. This means requesting grace periods regarding the maturity of the repayments of the principal and, on occasion, it is also necessary to obtain additional liquidity from the financial institutions for what remains of the “wilderness”.
In order for the refinancing to receive the necessary support of the financial institutions, it is a basic requisite that the business of the company must be viable in the long term, with an operational restructuring being carried out if needed. The viability plan of the business must be the result of a strict analysis, and the preparation of financial forecasts must be shared with the financial institutions with total transparency. Given the short time provided by insolvency legislation for refinancing processes, the sooner they begin, the greater the likelihood of success and the better the final agreement with the financial institutions should be.
The refinancing process may last 3 to 6 months and requires intensive devotion. Based on the viability plan, the refinancing proposal is designed and contacts commence with the financial institutions, requesting their support and meeting their requests for information. The financial institutions, in consideration for the effort requested of them, also request effort from the shareholders: capital increases, provision of guarantees, operational restructuring, etc. After the closing of the refinancing, the shareholders should not cease resolving the structural problem represented by high indebtedness, giving way to the entry of a financial investor. In this sense, there are a multitude of investors with abundant liquidity prepared to invest in companies which are attractive but financially unstable due to excessive indebtedness. The sacrifice such businesspeople must make in the valuation of their company in order to allow the entry of these investors may be more than offset by greater financial stability and a better situation in all aspects until recovery progressively accelerate in the coming years.
In a refinancing process, having a financial advisor can be very recommendable as it allows the introduction of methods and rigor into the work process, so that the company managers can continue to devote themselves to the business and avoid considerable emotional exhaustion, and the financial institutions can find a interlocutor professional interlocutor facilitating the negotiation.
Carlos López Casas, Partner Auren Corporate.