Spark! Informal Debt Workouts - Introduction
Welcome to our Debt Workouts homepage. In the general course of business, unplanned and unforeseen events can interfere with debt repayments. Where debtors behave transparently and manage their creditors expectations, debt can be worked out informally through various mechanisms. Creditors are surprisingly co-operative if you act with urgency and transparency, however then unfairly labelled intolerant and uncompromising when debtors adopt delinquent and unconstructive behaviors.
Whether debtor or creditor, you can manage this issue without having to hand it over to a legal reecoveries team for resolution. We understand that s truggling to meet your debt obligations or worrying about having to write-off debt or a loan is stressful, but rest assured this can be dealt with. As a debtor, you may well be entering this process for the first time, you may feel isolated and be shouldering the emotional burden alone, and you probably feel isolated not knowing who to turn to and who to trust. As a creditor, you probably feel frustrated, and even angry, at being placed in this situation. Either way, if you follow our advice, and ponder the approach we espouse, you should have a far better chance of resolving this situation properly, and be able to move on.
Debtors, Creditors and those representing them, will find examples, tools, discussion documents, and worked examples to assist them in their Debt Workout Processes. You will see that informal debt workouts can have significant scope well beyond what you might expect, and are an important tool that is available within what is a broad set of options, if action is taken early and players are able to co-operate. Here are the essential pages:
- Global Benchmark of Insolvency Indicators and the need to do things differently in SA.
- Build Momentum internally, Demand Austerity and Show Credible Intent.
- Key enablers & Principles to embrace for a Debt Workout.
- Redefining the scope of a workout and achieving more.
- Stakeholders, Process Walk Through and Decision Trees.
- Keeping Up with Global Insolvency Trends.
Your Debt Workout - Make informed decisions and plan.
You simply must assess and understand the rights, habits and scope for compromise different creditors have and who the key decision makers are. The manner in which a secured creditor like a Bank approaches compromises, restructuring, workouts and risk is quite different to that of a Credit Insurer like CGIC, who in turn will deal with debt very differently to SARS, and other preferred creditors like the City Of Johannesburg. Each of these will display varying risk appetites, and be be guided by directives that change periodically in their approch to a debt work out.
Act quickly and do not delay - give yourself time
Nearly every avoidable insolvency has one thing in common, debtors acted too late, and creditors were too late in being informed and asked to co-operate. A creditor's willingness to co-operate and to accommodate you with time wasted. Debtors fail to realise that a creditor will think one of two things immediately if you spring some surprise on them. If you knew about this earlier then why were they not informed, and will conclude that they are not a priority, that their issues are a distant second place to yours and others, and so why should they accommodate you. Even worse, if this nasty surprise is also a surprise to the debtor then just how competent and in touch is the debtor firm's management team, and why waste time with a team that's not going to be able to turn things around. And who can blame them for thinking this? So act early!!
This will shock you, but I have encountered firms where they management and board spent more time choosing their end-of-year party location, than they did discussion their approach, tactics and support for either informal workouts or formal rescue.
How is it that for one of the biggest investment choice's in a young couple's life, they might visit 10-20 homes, but for the more important process that their business is embarking upon, they fail even to interrogate a single of their
A Clever Workout is not a ZERO sum gain
Insightful and wise creditors realise that one party need not profit at the expense f the other. In fact what happens is that Debtors and Creditors either lose together or win together.
If you think a workout is just a discussion about the debt itself and workout discussions have or are focusing on:
- Requesting a temporary reduction in interest rates
- Seeking a temporary period of grace or forbearance - skipping a few payments
- Adding these skipped payments to your outstanding loan balance
- Extending the term of your loan
- Setting up a new repayment schedule
- Re-contracting a new or better loan instrument
then you are doing yourself and your business a HUGE disservice!
A debt workout should be MUCH more than that, and should commit to full consideration of:
- Aggregating your Creditors properly
- An assessment of your Strategic position and Company Restructuring alternatives
- Operational restructuring improvements
- Self-funding efficiency and waste removal tactics
- Financial Restructure options
- and all Debt Refinancing options (not just those few proposed to your business so far!)
Learn from Others
Debt workouts have been taking place for centuries, but it was only after the crisis in the City in the 70's and the Asian debt crisis prior to 2000, that Central Banks, Corporations and regulators started to apply insights, which are used in the US, the City, in Europe and in Asia very effectively, but not so in SA.
Often a debt workout will be one of the remediation actions that must be considered when dealing with a turnaround. We are members of the Industry Governing body: Turnaround Management Association of South Africa, the link to which is provided at the bottom of this page.
The Debt Workout -
A "Debt Workout" is a mutually-negotiated modification of debt that does not involve a bankruptcy filing but which remains formal. Simply stated, it is an agreement worked out between the debtor and creditor or creditors for repayment of the debt obligation. The process avoids bankruptcy and is less onerous and more flexible than either business rescue or insolvency, and where possible should always be a serious consideration.The key points to note are:
- This voluntary process avoids the "stigma" of bankruptcy
- It achieves similar results to bankruptcy filing - i.e. discharge from a portion of debts
- this does not affect the debtor's rights to file a future bankruptcy or pursue business rescue later - but please check with your legal advisers
- in general it is cheaper and has fewer time constraints imposed on the business - if done properly
- Seldom, if ever in SA, no effort is spent on necessary turnaround activities within the debtor business, a lost opportunity for creditors and debtors alike!
Broadly speaking there are two types of Debt workouts: compositions and extensions, neither of which include scope for rehabilitation of the debtors fundamental issues causing the distress
A Debt Composition
This is a contract between a debtor and creditor/s in which the creditors agree to take a partial payment in full satisfaction of the original claims.
A Debt Extension
This is a contract between the debtor and creditor/s where agreement is reached in extending the time for payment of the original debt.
Obviously there are workouts which are a combination of these i.e. both a composition and an extension. The same laws govern both compositions and extensions.
The advantages of this approach far out-weigh any dis-advantages of which there are few
How we add value to your Debt Workout
There are three (broadly speaking from a business perspective), type of creditor,Institutional lenders, Supply-Chain Creditors, and non-core suppliers. Each of which have different motives in seeing you either continue as a going concern or merely fulfilling your debt obligation. This means that they must be dealt with in different ways.
Let's consider them individually for starters.
Your Supply Chain creditors
Characterized often by a long working relationship, which counts for something. They have no interest in seeing you not emerge as a going concern with whom they will continue to do business in the future. They want and need you to succeed, most often.
Your Institutional Investor
Characterized often by a long relationship, which has moved from your relationship manager over to credit. they work for the same institution but they are not the same kind of person. Your credit person in a bank, is a hardened, well educated individual that's walked along many different paths, seen a lot and heard even more. Any of the big four SA banks will have a lending book coming to about ZAR 10 Billion, just for Small Businesses. they work off a portfolio of risk, of which your business is a small part. Don't mess them around. they are powerful, not to be trifled with and unforgiving, but very reasonable if you are professional, credible, honest and deliver. They are very familiar with debt workouts, so you MUST make an impression when dealing with them. We'll show you how. If you walk in demanding extra time or a reduced obligation, you're looking for trouble. But ifyou walk in with a propoer plan, delivered actions on your austerity measures, show that any changes you are making are self-funded and show urgency and commitment, you'll be much more likely or having a favourable reaction.
Your non Supply Chain creditors
In general they are more interested in their cash than your survival, but you have more power and they can be easier to deal with - but don't sully your reputation by neglecting them. They too are often small businesses, treat them as you would want to be treated yourself.
A debt workout with a difference
Our approach is to equip you with all the insights from a business diagnosis, which is summarized in an action plan with clear steps on how to capture the savings and benefits you need to meet your obligations - we go way beyond asking for mroe time or redcued debt - your creditors like this, they have every reason to! It shows an understanding of the problem, meaningful steps, measurable benefits and is simple and gives them a better chance of getting their money back. We remove as many excuses or obstacles in their way of not co-operating with you and reaching a compromise.
These are the key ways in which we add value to this debt workout
- This is much cheaper than any rescue or foreclosure
- The methodology we employ targets hardcore survival and cash flow initially
- We show how we will realise the benefits with simple action plans
- Are tactics and tried and tested and typically add 30-50% on the bottom line within 12 months
- We drive self-funding removing the need to have additional working capital invested in the business
- We will work with you and coach you through as much of the work as we can ensuring knowledge transfer
- We have access to funding an are willing to put our money where our mouths are, we will buy the debt if your creditors are unwilling to compromise
Your Debt Workout Focus Areas
This is not about asking for more time or reduced debt, it's about showing how you are implementing remedial steps to assure your creditors and at the same time to re-invigorate your business to thrive in the future!
we apply much of the insights and tools we use in business turnarounds and coaching and to a lesser extent rescues. Have a look at some of our IP.
- Cash & Value Based Management
- Strategy & Planning
- Operating Model and the Value Chain
- Key Processes - monitoring, ownership and removal of waste
- People management, accountability, incentives and structures
- Personal Development and Leadership
- Institutional habits, alignment and communication
- Reliable execution