The current economic climate leaves a lot of companies exposed to lower trading volumes, pricing pressure, stretched client payments and cost structures that can not easily be aligned. Consequently cash flows come under a significant pressure and are sometimes insufficient to pay back debts or worse interest payments. Combining this with a banking sector that remains very prudent and needs to align their own risk and capital structure, and we have the perfect scenario for potential stand off between the two major pillars of our economy.
Can this be avoided?
The answer to this question can be positive but this requires immediate pro active action from the companies facing these difficulties.
The first step would be to create that common information platform that answers some key questions about the strategy, the alignment of the operational cost base, the short and medium term liquidity needs and the projected cash flows. An independent view on these matters is imperative to create that platform and to take away part of the unrest amongst stakeholders.
A second step would be to think about options and solutions that can be brought to the table, these options may include further need for restructuring, a debt push equity swap, debt covenant adjustments, disposal of non core business, etc….
A third step would be to implement the solutions and to keep all stakeholders informed about the solution process.
Would this approach avoid the clash? Future will tell, however its shows that there are ways to avoid it.
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