The necessity of restructuring and elements to take into consideration
The Founder and CEO of Akerton Partners, Francisco Camacho, attended the Family Forum on the 2nd of July in Madrid.
During his presentation, Camacho spoke about the reasons why a business has to restructure its equity or debt. He believes that “we have to dedramatize having to restructure a company’s debt or capital”, because “every business has to”. What’s more, “large ones do it every year, with the IBEX 35 on top of the list”.
Due to the crisis in 2008, distress and catastrophe have been associated with restructuring, but this is not always the case. The reason for this perception is that restructures began within the real estate sector due to a lack of liquidity (assets weren’t being sold, and this caused disequilibrium owing to the absence of cash flows).
The reasons behind a rebalancing are varied. The rebalancing of equity structure in a company may result from its smooth functioning; however, there are other causes of a rebalancing that result from a more negative situation, such as a company being on the brink of bankruptcy.
The first type includes acquisitions (inorganic growth), productive or commercial investments that cause organic growth, the utilization of a favorable economic environment (a decrease in interest rates allows companies to lower their interest on debt) etc. Ultimately, broadening and strengthening the business model in a situation of economic strength, both internal and market based.
Within the not so positive reasons for the re-equilibrium of equity/debt structure in a company we find:
- Excessive outgoing cash flow on the generated operating cash flow, unbalanced with weak financial structure.
- Investments made with negative returns.
- Non recurrent losses due to external factors, such as a downturn in the market or tensions in financial markets.
- Overstock and poor working capital management.
- Confusion between working capital and investments maintained through time that resembles CAPEX.
Another issue that restricts cash flow generation is the allocation of generated resources or activities that aren’t core to the business such as real estate investments (hotels, wineries, etc.) Generational changes sometimes distance the family company from its core business.
In essence, the financial re-equilibrium has to take place when the use of financial instruments within reach of the company create a temporary solution and it, maintained over time, creates a disequilibrium on the balance sheet structure.
Basic fundamentals to take into account when we face capital restructuring
We must consider two fundamental issues:
- The maximum capacity of indebtedness in a company is the present value of the cash flows (adjusted for debt) during the life of the loan.
For those estimations we have to consider: the need of constant use of resources while not forgetting the necessity to reinvest and maintain balance between generated cash flows; what has been invested and the distributed dividends; what is held in the balance and the company’s indebtedness.
- Debt structure. The financial structure has to match the type of business. It is different for industrial or retail companies, for example, and there are also differences depending on seasonality. Each company needs a different structure with separate financial products and deadlines.
Long-term investments should be financed with long-term debt. Never should short-term debt be used for long-term investments.
In addition, we should take into account the maturity of the debt. Debt cash flows should be aligned with operative cash flow generation, as well as other cash inflows and outflows.
In conclusion, the President of Aketon highlighted that when cash inflows are higher than outflows, the company has economic viability and a viability plan can be designed.