Restructure to Rebuild Before It’s Too Late

As the construction sector continues to contend with the impact of the pandemic, Pauline Rigby, head of corporate at Forbes Solicitors, looks at the restructuring options that could save companies before it’s too late.

Recent Government data puts into perspective the plight facing the construction sector. Wave 23 of the ONS ‘Business Impacts of Coronavirus’ survey, released on 11 February 2021, shows almost four in ten construction companies (38.8%) don’t have sufficient cash reserves to last more than three months.

Analysis by the UK’s number one insolvency score, Red Flag Alert, also highlights that insolvent debt in construction last year grew at twice the rate of the national average. The firm’s Write Off data tracked growth of 6.6% in the sector, rising from around £252million worth of insolvent debt at the end of 2019 to £268million at 31 December 2020.

Unfortunately, these figures suggest that business failures are likely to become more and more of a reality in the construction sector in the coming months. The combination of cashflow challenges, loss of revenue and mounting debts can make it difficult for businesses to face up to failure. This accelerates the risk of contractors going bust, as problems aren’t addressed and solved in time.

Additionally, it can mean that one of the most effective routes to business rescue – restructuring – is overlooked. There’s often the notion that restructuring is time consuming and doesn’t fit with the urgency to generate cash quickly. This doesn’t need to be the case.

One of the most positive signs of optimism for the sector is that, despite challenges, there’s strong levels of confidence. The ONS data also highlights that 37% of construction companies reported high confidence they will survive the next three months, while 43.6% have moderate confidence. This outlook can prove the difference in considering restructuring options and taking action before businesses pass the point of rescue.

There’s a number of restructuring options that struggling companies can utilise to fend off failure – and time is of the essence.

Capital restructuring 

Many failing contractors will often hold significant equity in fixed assets. In some cases, this value isn’t unlocked until the company has gone into administration, when equipment will be sold-off to pay outstanding debts. Leveraging the value of fixed assets before this point can deliver a much-needed financial injection that supports survival.

It’s possible to organise this form of restructuring to sell the full asset or retain part-ownership, to form agreements for buying-back what is sold and to trade the value of fixed assets for equity shares in the business. This can mean that companies retain their tools of the trade to physically keep working, while also balancing the books.

The possibilities will depend on a number of factors such as valuations of assets, modelling of forecasted revenue and consideration of how capital will be reinvested into the business.

Debt restructuring

The widespread impact of the pandemic has changed attitudes towards the management and repayment of debt. Creditors are increasingly pragmatic and willing to take a longer-term view of recovering money and maintaining relationships. This could prove particularly relevant for the construction sector, which, due to the very nature of lengthy project contracts and general acceptance of balloon payments, operates on long lines of significant credit.

There’s increasing opportunities for struggling contractors to reorganise debt terms and conditions, which can deliver a noticeable impact on cashflow that benefits survival. Essentially, the point to note here is that companies in financial distress don’t have to wait for a formal insolvency process to do this. It’s possible to enter into informal discussions with creditors to explore what the options are. By acting earlier and drawing on the experience of professionals such as accountants or lawyers, businesses will find there’s more debt restructuring options available such as covenant waivers, trading debt for equity and renegotiating payment amounts and interest rates.

Success in this area of restructuring will be rooted in clearly agreeing revised terms that balance the requirements of a struggling business and its creditor(s).

Company restructuring

A viable form of company restructuring for a business in financial distress could be a demerger. This can involve separating entities into different ownership structures to create distinct stand-alone companies.

Taking this approach can prove useful in protecting better performing parts of a company from other elements of the business that are more at risk of failure. Separating-off more successful parts of the operation can assist the reorganisation of debt, strengthen the prospects of new investment or refinancing and concentrate operational focus on the high potential parts of the company that are more likely to drive survival and growth.

Employment restructures

Making redundancies is never easy and a step that many contractors will, understandably, want to avoid. Unfortunately, though, the reality is that a business experiencing a downturn in financial performance will not have the demand to justify all salaries. Efficiencies can be realised through a leaner workforce and acting earlier to address employment structures could prove the difference between making some redundancies and losing all jobs when the business goes into administration.

As part of an employment restructure, companies should avoid taking a salary-only view towards making savings and also consider options for reducing contracted hours and job sharing before making redundancies. This will require consultation of employment contracts. Contractors should also ensure that the restructure considers any expenditure on third party suppliers and how outsourcing contributes to short-term performance. These steps could help leave the company in the strongest operational position for survival and also help avoid being left short in terms of capacity and ability when business picks-up.

Making restructuring work

Time and objectivity are key when it comes to restructuring. Dealing with a failing business and trying to fight-off administration is a tough task and, when business owners and senior leaders are in the thick of it, it can be easy to be blindsided by what the available rescue options are. Taking the time to step back and seeking an external expert view, from various perspectives from financiers, accountants or lawyers can boost chances of survival, rather than leaving it until it’s too late to turn things around.

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