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Spark's Debt Workout Approach

Spark! Informal Debt Workouts - Enablers & Principles for a Successful Workout

Most reasons cited for a firm’s debt remediation failure, distill to common underlying causes and so we can identify key enablers of the process:

  • The Homogeneity of the debtor’s creditors (which includes the concentration and relative priority/sub-ordination of debtors)
  • The willingness to act in good faith and to demonstrate integrity and intent. (i.e. not see this as an opportunity to extract additional securities or concessions)
  • Interest (material or otherwise) in the continued viability of the debtor business, in one form or another.
  • Objective, impartial, credible, non-adversarial and fair arbitration in key points of dispute/contention
  • An enabling legal framework, in so far as alternatives can be considered, their costs compared, rights benchmarked, process steps guaranteed, timelines defined etc.

This final point is apparently a subtle one. Experience in other parts of the world (Asia after its debt crisis pre-2000, the London Approach from the City’s 70’s oil embargo crisis) has shown that the formalization of something like the 2008 Company Act and the new Business Rescue framework, should have seen a rise in informal debt workouts! Creditors as well as Debtors should see the 2008 Company Act as complementing the existing tool set available to them. Informal Workouts are more relevant now with the formalization of Business Rescue!

Key Principles Emerge after considering the Enablers

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 insight and many of the tools we use in business turnarounds and coaching and to a lesser extent rescues. Have a look at some of our IP.

  1. 1st Principle: Where a debtor is found to be in financial difficulty, all relevant creditors should be prepared to cooperate as a collective and removing the need for total unanimity before a workout can proceed. A minority of unsupportive creditors should have some mechanism to bind them to the majority.
  2. 2nd Principle: The creditor collective should give sufficient time* (limited and reasonably prescribed by a trusted arbiter) to the debtor, initially for information and data gathering (for creditors to price their risk, and to consider their composition/extension position ) and then for the development of a proposal to resolve the debtor’s financial difficulties and to fulfill their debt obligations and to remain viable as a going concern.
  3. 3rd Principle: The debtor should only be granted the privilege of a grace period under signed-off (and if necessary tested) notification guaranteeing implementation of prescribed (yet reasonable and common sense) business stabilization and austerity measures in the debtor business.
  4. 4th Principle: The proposal will be prescribed by the creditor collective and must show consideration and sufficient analysis of:
    • Continued Business Stabilisation and Austerity Measures
    • Strategic Review
    • Financial Restructuring
    • Debt Refinancing
    • Company Restructuring
    • Operational Restructuring
    • Tactical self-funding initiatives
  5. 5th Principle: During the grace/standstill period, all bargaining creditors of the collective agree to refrain from taking any steps to enforce their individual claims or to reduce their exposure (i.e. by breaking rank or seeking disposal of their debt to a third party, however an exception to debt disposal should be considered if it is to an existing creditor not requiring introduction of a new stakeholder to the process whose commitment is unknown and who will not need to be brought up to speed in terms of information and understanding)
  6. 6th Principle: The collective creditors are entitled to expect that during the grace/standstill period their position relative to other creditors will not be prejudiced, especially by any actions of the debtor.
  7. 7th Principle: Decisions about a company's longer-term future are only made on the basis of reliable information and reasonable assessment of key risks.
  8. 8th Principle: As a tool for transparency, and to expedite decision making, the creditor collective should delegate decision making to a sufficiently skilled steering committee that:
    • Can balance the different demands of the Creditors
    • Ensure that WACC considerations, be properly quantified.
    • Assess the viability of the proposed rehabilitation/remedial steps
    • Identify, Assess, and Price risk, especially ito non-delivery
    • Communicate clearly and unambiguously
    • Devote sufficient time to key oversight, and decision making tasks
  9. 9th Principle: The workout process should be managed by a sufficiently qualified Programme or Project manager supported as required, so that:
    • The agreed timelines are met
    • Actions, deliverables, and outcomes are properly documented
    • Delivery accountability is tracked and progress reported on
    • The agreed process steps are followed using the agreed templates
    • Communicate clearly and unambiguously
    • Devote sufficient time to key oversight, and decision making tasks
    • Risk is mitigated and creditor concerns managed
    • Where sensitive debtor data and information is made available to the creditors, it is safely managed as reasonably expected of confidential information.

Driving Sustainability

After all the initial hard work, you want to capitalise on these efforts and take your business to the next level. You will address, at your leisure, and in an manner of engagement that suits you the following typical problems that are usually the root of the initial business performance issues,

  1. Problems of delegation and team-building - As a business grows and succeeds the role of the managements must evolves into that of leadership. This manifests itself in needing to control, not letting go, and the failure to delegate to a team better equipped to do what needs to be done.
  2. Poor data - We are entitled to our own opinions but not our own facts. Facts require data, and business strategy and management of a business, almost always requires data.
  3. Structure - Your business is nothing more than a large team of people, relying on each other to do what is required and expected of them in a consistent manner, the outcome of which customers use to solve their problems or make their lives easier. This needs clear delineation of responsibility, clarity about hand-over points, everyone to understand their role, and to be held accountable and be rewarded for their efforts or lack thereof.
  4. Thought leadership - Success will bring the unwelcome attention of your competition. The ability to navigate the market, predict trends, understand consequences, out-maneuver your competition and lead the business, demands a strategic line of thinking rather than merely the operational kind that was so successful in a small firm.