Roland Berger: financial restructuring contributes to successful turnarounds: financing program must be tailored to company specifics. The success of corporate restructuring essentially depends on the financing model applied by the companies in distress. The financing environment in German has become increasingly complex in recent years as banking regulations have been tightened and more financial stakeholders with divergent interests have entered the fray. And this has a direct impact on how companies are financed in a restructuring situation.
In a new study, “Financial Restructuring 2015”, experts from Roland Berger offer an insight into the most frequently used financing instruments and what influence they have on a company’s restructuring success. Their findings were obtained from a detailed analysis of financial data from more than 9,000 German companies with revenues in excess of 100 million euros spanning the period between 2006 and 2014. The Roland Berger experts identified some 200 restructuring cases; almost half of them managed a successful turnaround within three years.
“Recent examples demonstrate the fact that corporate financing needs to be restructured as a crucial element in guaranteeing turnaround success and securing a company’s future,” explained Sascha Haghani, Roland Berger’s Deputy CEO Germany and Head of the Restructuring & Corporate Finance Competence Center.
Corporate bonds and institutional investors are now more important
Tighter banking regulations and the low interest rate environment have brought about a structural change in Germany’s financing landscape: since 2007, the volume of corporate financing issued through corporate bonds has risen by about 13 percent per annum. Private equity investors, too, have increased their engagement with German companies, their lending rising by an average of 18 percent for each of the years between 2009 and 2014. Leveraged buy-outs rose by as much as 28 percent per annum.
“Alternatives to traditional bank financing have become increasingly important for German companies in recent years,” as Matthias Holzamer, one of the Roland Berger financing experts, explained. “For one thing, big companies with good credit ratings are able to finance their business at lower interest rates on the capital market, but the other thing is that some institutional investors are literally forcing themselves on companies by offering them low-interest, covenant-light loans.”
Financial restructuring is ever more crucial
Given that we have seen an increase in financing through the markets and institutional investors, the importance of financial restructuring is going to be correspondingly greater in future distress cases. Holzamer issues a cautionary note: “Companies will need to pay attention to the divergent interests of the different stakeholder groups like banks, corporate bond investors, hedge funds and mezzanine funds, all of which will have their own security arrangements. In many cases, that is one of the most difficult aspects of all – numerous restructurings have failed for that reason.”
Companies in distress will need to combine a range of financing instruments if they wish to find the optimum solution for all restructuring stakeholders, create the right financial basis to enable value-adding investments, and escape the liquidity squeeze. The Roland Berger experts’ analysis found that the greatest effect on restructuring success was produced primarily by cash capital increases and debt-equity swaps in combination with a haircut.
Furthermore, a company’s likelihood of achieving a successful turnaround was found to rise the more instruments they combined in the process of financial restructuring. Companies that used more than five of the instruments had a success rate 8 percentage points above the average. It was not possible, however, to discern a “typical” combination of instruments. In practice, their application depends greatly on the circumstances of the individual case.
“Financial restructuring is hugely important, but it is not enough – on its own – to successfully turn a distressed company around. Strategic and operational restructuring are equally relevant. The financing models therefore need to be embedded in a well-considered, all-round restructuring program,” said Roland Berger Partner Sascha Haghani in conclusion.