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Reflections of a Restructuring Advisor – One Year into the Pandemic

Date: Feb 23, 2021 @ 07:00 AM
Filed Under: Industry Insights

Hard to believe it has been almost 12 months since the NBA cancelled its season and states began deploying shelter in place regulations due to the COVID-19 pandemic in the U.S. This was my personal demarcation point. So much has transpired, yet many days have had a very distinct Groundhog Day feel to them. Let’s take a trip down memory lane as I share some observations from my recent roles as Restructuring Advisor, Investment Banker and Independent Director, among others.

During the first week of March, Phoenix had finalized the terms of 90- to 120-day forbearance agreements for three separate clients. Many of these terms were never implemented due to COVID, and as we approached the end of March, a couple of things were clear. First, lenders were motivated to have documentation supporting an extension before the expiration date. Second, lenders to all of our clients provided tremendous accommodations. And third, no one had any visibility into the future. To deal with the pending March 31 expiration dates, our firm cut previous revenue forecasts by 30 percent and incorporated some cost cuts into our weekly cash flow forecasts. Lenders were more than willing to sign up for another 90-120 days. In one instance, the syndicate offered to defer the March 31 and June 30 principal payments, and in another the lender accepted a $6.5 million overadvance on a $15 million line of credit. Accommodating, indeed! Not unexpectedly, we did observe that lenders were more insistent that private-equity owners participate in incremental funding needs than they were of family or closely held companies.

April found many turnaround and restructuring professionals assisting clients attempt to navigate the Paycheck Protection Program (PPP) loan application process. Lenders at most regulated institutions were consumed with processing applications once their portals opened, and, in light of the uncertainty regarding all aspects of life, there was almost no new lending activity. At Phoenix, we assisted 24 clients obtain PPP loans, all of which extended the cash runway for these companies and several of which literally saved the companies. PPP loans certainly had their intended effect on many needy borrowers. With this influx of capital, and the likelihood that most or all of these loans would be forgiven, some borrowers did not properly right-size their business or make the appropriate cost cuts, which has certainly deferred the day of reckoning for some.

As we drifted into summer, lenders continued their accommodating behavior. Federal agencies and state bank regulators encouraged lenders to work with borrowers and relaxed standards regarding troubled debt restructurings, which certainly helped. This, combined with the continued lack of visibility into future performance, were the primary factors in fueling the continuation of short-term extensions.

I have been amazed and heartened by the resilience, creativity and fortitude of so many companies that have been impacted by the pandemic. It has not solely been about cutting costs. Our clients have accelerated their pivot to ecommerce, introduced new products, developed new distribution channels and so much more.

We began to see a noticeable shift beginning in the fourth quarter of 2020 that has continued into 2021.  Lenders are definitely showing signs of being less accommodating. I think there are a few factors at play. First, there is more visibility into the future than there was six to nine months ago. Borrowers are much more comfortable publishing a two-year forecast, an exercise that seemed like a complete waste of time in Q2 of 2020. As a result, the “amend and extend” play has been replaced in many instances by longer term deals, which have provided much needed stability to borrowers who no longer need to be focused on short-term maturity dates. Second, it appears that lenders are getting back to a bit of basics – identifying business plans and management teams that they believe in and want to back versus those that don’t inspire confidence. Over the past few months, we have been introduced to a number of situations where the existing lender is looking for business plan and financial forecast validation from a third party. We have also recently been introduced to situations where the lender has already determined to pursue an exit strategy. Keep in mind that in all of these situations the borrower has seemingly survived the worst of the pandemic and revenue has rebounded close to (and in one case in excess of) pre-pandemic levels.

Lending activity in Q2 and Q3 of 2020 was lackluster, due to the contraction of many businesses combined with the massive injection of capital from PPP and Main Street Lending programs. The pendulum has swung, and attractive credits (and even some borrowers with some unsightly blemishes) are able to command extremely attractive pricing (LIBOR+250bp) and loan packages as competition is once again fierce.

In this low interest rate environment, we are seeing lots of banks, non-regulated lenders and funds chase yield by migrating into more risky loans. It’s been more than a decade since the last downturn and many of the individuals at these institutions are not deeply steeped in problem loan management. I expect that many of these borrowers will continue to struggle and it will be interesting to see how these new entrants manage through these situations.

Moving forward I expect to see more operational focus on growing revenue than reducing costs. During the past 11-plus months, most companies have sufficiently reduced overhead. We have one client in particular that has “delayed” it’s right-sizing in the hopes that volume would return and/or increase. Needless to say, this company continues to struggle from a liquidity standpoint, has lost the support of its existing lender and has had difficulty obtaining the confidence of prospective lenders. Our analysis regarding ROI for capital expenditures is more robust than it has ever been. What’s the operational and/or efficiency improvement? How sustainable will it be? Is it applicable to all product lines and services or just select ones? If the ROI is largely dependent on increased volume, what’s the sensitivity to not meeting these forecasts?

Increasing and improving revenue is the name of the game in 2021. Let’s hope that the economy continues to improve, and everyone benefits from this “rising tide.” I have had many conversations recently with clients about improving revenue. This includes price increases, eliminating unprofitable SKUs and in certain cases – “firing” less profitable customers that may consume an inordinate amount of overhead or who have negative working capital characteristics. Products/customers may generate an acceptable gross margin, but if the company needs to prepay for raw materials and then gets paid in 60 or 90 days, a different picture emerges. Recently I have found our clients more willing to have these conversations and to actually pull the trigger on implementing change.

Finally, I think we will continue to see bottlenecks in the supply chain from Asia deep into Q2. This has and will continue to manifest itself in delayed shipments and more costly freight.

Michael Jacoby
Senior Managing Director and Shareholder | Phoenix Management Services
Michael Jacoby is a Senior Managing Director and Shareholder at Phoenix Management Services. He is a skilled executive with extensive operating, turnaround, restructuring and M&A experience. He has served in advisory capacities as well as independent director, and interim manager for more than 325 Phoenix clients in a variety of industries. He has also been instrumental in assisting numerous clients with their financing, divestiture and restructuring needs. Before joining Phoenix in 1992, Jacoby worked for PNC Bank in Philadelphia, where he managed a $500 million commercial loan portfolio.

Jacoby earned a B.S. in Economics from The Wharton School of Finance, a B.A. from the University of Pennsylvania, and an M.B.A. in Finance from Temple University. He holds the Certified Turnaround Professional (CTP) designation from the Turnaround Management Association, the Certified Cash Manager (CCM) designation from the Association for Financial Professionals and the Certified Management Consultant (CMC) designation from the Institute of Management Consultants.

In addition, Jacoby is registered with FINRA and holds his Series 79 license and is a Fellow of the American College of Bankruptcy. He is President of the Philadelphia Chapter of the Association for Corporate Growth and a Board Member of the Philadelphia Chapter of the Secured Finance Network and the Consumer Bankruptcy Assistance Project and is active with other professional and charitable organizations.
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