Companies should think about restructuring as a strategic transaction
In the current climate of economic uncertainty, organizations are keeping a close eye on emerging practices and trends in restructuring and insolvency. Just as the pandemic has changed the way that lenders approach distressed situations, businesses are embracing creativity in their restructuring arrangements.
Experts discussed restructuring and lending in the current landscape at a recent webinar hosted by Torys LLP’s corporate restructuring and advisory team. When engaging in restructuring activities, organizations must address immediate considerations, together with a long-term strategic vision that brings together insight from across all advisory teams.
2021 was a robust year in terms of corporate lending, according to Sundeep Bhakoo, managing director, corporate investment banking at TD Securities, who was a guest speaker at the webinar. However, he noted that there has been scaling back of M&A activity this year as businesses wait for volatility in interest rates to settle. The slowing M&A activity has also had an impact on debt capital markets and equity capital markets, Bhakoo added.
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“From the restructuring side there has been quite a slow down since mid-2021 as the industry is impacted by COVID,” he said.
Based in Alberta, Torys partner Kevin Fougere noted during the webinar that while corporate lending is quite healthy in western provinces, the volume of restructuring files he is handling has dropped considerably over the past two years – declining from around 80 per cent of his practice two years ago, to just 10 per cent today.
Many companies have taken on additional debt during the pandemic, to deal with distressed situations, either through government support programs or through enhanced borrowings.
“Extended demand is great, but you’ll eventually hit a wall where you’ve got to work out your financial situation,” said Scott Bomhof, a partner at Torys who also spoke at the webinar. “There may be opportunities to work with lenders, whether it be on the bond side or the bank side, and try to fix your balance sheet.”
To some extent, the pandemic has changed the way in which lenders approach distressed situations.
“Stress from the pandemic was unique because there was no playbook for dealing with that kind of situation,” said Bhakoo. “It forced an acceleration of some of the changes that were already happening in the market.” Instead of moving to immediate enforcement by appointment of a receiver, people are evaluating alternative options and examining the position of all stakeholders.
Companies should think about restructuring as a strategic transaction, and engage the right stakeholders early on, according to Bhakoo.
“Management teams are generally very good at M&A transactions to grow the business, but when it comes to restructuring, sometimes that’s not the mindset,” he said. “Hopefully the C suite thinks about restructuring more as a strategic transaction, where they put the right people and the right lens to it, because it is a transaction for their survival."
Companies often don’t consider restructuring options until they are on the verge of a serious default when it can be too late to find a solution, Bomhof added.
Looking ahead, Bhakoo anticipates weaker companies will start seeing signs of stress later this year or early in 2023.
From a Western Canadian perspective, Fougere anticipates more M&A in the next few months, and further opportunities for distressed borrowers to sell – either by choice or because banks are becoming less patient, and demanding payments.
