To turnaround a business, management and its advisors can devise a plan that focuses on the possible changes in the operations of the business so that it can return to profitability. This is often referred to as either the operational restructuring or turnaround plan. These plans usually include a range of measures such as cost cutting, which might include laying off staff, renegotiating leases, or reducing marketing spend.
Limiting capital expenditures to the bare essentials, or focusing investments on profitable business units only.
Revising working capital management. This could include reviewing payment terms with customers and suppliers, and reassessing required inventory levels.
To devise and implement such a plan, a company needs to buy as much time as possible. This usually involves maximizing readily available liquidity, drawing down committed available credit lines, and looking for opportunities within existing debt documents. For example, available baskets are ways to raise liquidity in the short term, and therefore extend companies time available to consider its options. Remember that baskets under a financing agreement provide certain available amounts as allowable exceptions to a covenant restriction. For example, a covenant might allow that a company raises additional debt or engages in debt funded M&A up to a certain amount without triggering any covenant restrictions.
Another way to buy time is through engaging creditors and asking for amendments, waivers, and forbearance. A company may try to engage in an amends and extends A&E or exchange, offer conversation with creditors to alter the terms of existing debt arrangements. such as extending maturities or if needed to ask for waivers to avoid an event of default. For example, if the borrower is at risk of potential covenant breaches and forbearance agreements may also be sought to avoid enforcement action. These agreements provide temporary relief from creditors for the company to assess its options.
An operational restructuring might be all a company needs to get back to a healthy state, but the implementation of a turnaround plan can be both costly and lengthy. To implement a plan like this. significant restructuring costs might arise to pay for things like redundancy payments for staff, or early lease termination fees. In addition, the plan might only project a return to profitability two or three years into the future, so in addition to the execution risk of such a plan, the company might require additional funds to survive up until when management expects it to go back to a profitable state. Typically, it's not straightforward to find someone willing to meet this funding requirement as existing creditors and shareholders might be reluctant to inject additional funds into a company already suffering significant financial distress. As a result, while the turnaround plan might look like the easy route on paper, in practice, its implementation can often be problematic and risky for most parties involved.
