The past few months have brought the importance of corporate contingency planning into sharp focus.
This year has seen 233 business rescue cases filed in South Africa including some major players such as South African Airways (SAA), SA Express, Comair, Edcon, Virgin Mobile, Phumelela Gaming and House of Busby. Many of these companies were already struggling before lockdown sent the economy into its deepest recession yet. The manufacturing, wholesale and retail, real estate, accommodation and food service activities and construction sectors have been particularly hard hit.
Many of the companies who enter business rescue will not survive. “We are entering a period of prolonged recovery fraught with uncertainty and risk where we are likely to see many more business failures – for both large and small business,” says Jo-Anne Mitchell-Marais, the Africa restructuring services leader at Deloitte. Jo-Anne is a UK chartered accountant by qualification and has specialised in solving financial distress over the past 15 years.
Deloitte’s restructuring services business unit was relaunched in November 2019. Since then Covid-19 has created a wave of demand for Deloitte’s restructuring and corporate contingency planning services. The main objective of corporate contingency planning is to avoid business rescue, but failing this, to support management and the business rescue practitioner through business rescue to restore the business to solvency.
Since its relaunch, Deloitte has positioned itself for restructuring projects throughout sub-Saharan Africa and has most recently completed a project in Cameroon. The financial advisory division has dedicated teams in South Africa, Nigeria, Ghana, Kenya and Zambia. Jo-Anne fears that the potential economic destruction caused by a second hard lockdown “doesn’t bear thinking about”.
Being proactive is vital
For Jo-Anne, being proactive rather than reactive is vital to navigating a period of financial distress: “In the restructuring market, we oftentimes see that there is an element of denial in large companies where there is insufficient planning and understanding of what contingency plans should look like for the ‘what if’ scenarios. The sooner a company considers corporate contingency planning, the more options are available to return the company to financial health.”
A corporate contingency plan is a proactive strategy that describes the course of actions the management of an organisation need to take in response to an event that could happen in the future. In the case of a financially distressed company, this could include a restructuring, a sale of assets or even filing for business rescue. “It's important to work out what the worst-case scenario looks like. Once, you have that picture, you can make more informed decisions,” adds Jo-Anne.
Key risks for the financially distressed
Financially distressed companies face several risks that need to be addressed. If debt covenants are breached or repayment dates are missed, lenders may call for the immediate repayment of loans. This in turn can accelerate a descent into business rescue and even liquidation.
Likewise, suppliers worried about the company’s financial performance, may call for payment upfront and put further pressure on cash flow. Employees fearing retrenchment may seek alternative employment, with the best employees being the most mobile. It is also not uncommon for an overseas parent company to want to shed its local, loss-making subsidiary.
Here, Deloitte works besides company management to handle tough conversations with all stakeholders. This includes negotiating with investors, lenders, suppliers and being transparent with staff. “You can’t just be a director in the good days. Every management team wants to stay in control of their business. Early, proactive communications are so important to remaining in control,” says Jo-Anne.
Maximising cash flow
Managing a financially distressed company’s cash flow becomes a top priority. This includes combing through the financials to pick-up unnecessary and irregular expenditure and investigating which contracts are causing a cash drain. Reducing office space required or negotiating with the landlord for a better rate can also be considered.
“Companies benefit from an outside perspective. At Deloitte we can use artificial intelligence interventions to produce quicker data to make better decisions,” says Jo-Anne. Deloitte will then suggest several interventions to optimise working capital and identify quick wins. The corporate contingency planning process can take between five weeks for a quick review up to 18 months for more complex cases.
The Deloitte pedigree
According to Jo-Anne, fraud is more commonplace than one imagines and is never nice to uncover. Here Deloitte’s forensic department can support a fraud investigation.
The wider Deloitte network is a major asset for Jo-Anne’s six-member strong team. She draws on different divisions within Deloitte to restore the company’s fortunes. These include tax, corporate finance, risk advisory and strategy.
In a time of Covid-19, restoring a company’s financial health may include a pivot into doing business in a digital world. Here again, Deloitte’s digital transformation strategists can assist.
Working as a restructuring specialist requires resilience. “What makes the job difficult is that we are always dealing with directors at a tough stage in their lives. It’s very lonely in these circumstances and oftentimes they must make the difficult, unpalatable decisions. Deloitte is there to support directors and guide them to these decisions. In these times, it is the success stories that keep us going,” concludes Jo-Anne.