Opinion: Restructuring and insolvency – the uncomfortable part of the new reality?

Market news
Market news
Opinion by Alasdair Freeman and John Kennedy

Energy Voice has recently published its latest research report “Sub $50 Oil – New Perspectives & Hidden Opportunities”. The aim of the research, as the title suggests, is to identify untapped opportunities in the oil and gas industry in the current low oil price environment, as well as uncovering the main risk factors in play.

In a pretty unscientific piece of our own research, a word search of “insolvency” and “restructuring” in the report reveals no results. While those areas are beyond the scope of the research, they are becoming important considerations for many businesses in the offshore industry.

It is increasingly clear that before any of the hidden opportunities identified in the research report can be exploited, some corporates are going to have to get through what can often be very complicated and stressful challenges in getting their funders comfortable with the sustainability of their business going forward. Many service companies are seeing imminent financial covenant breaches, and this, coupled with liquidity issues in the near term, means that there are difficult discussions to be had with banks to seek the necessary flexibility and breathing space to get back on track.

It appears that so far, most funders are maintaining their support. The relative stability of the oil price in the last three months helps. Despite it being significantly down from where we were 24 months ago, low, stable and slowly rising is better than moderate and volatile, at least when it comes to setting budgets and forecasts.

But businesses need to face up to what funders will require before they will come to the table with an offer to continue their support. In almost every case involving leveraged finance, any private equity shareholders will be asked to put their hands in their pockets. Banks need to see this shareholder commitment (and often also from management), and clearly want the business to be deleveraged as much as possible in the short term. Cost cutting is still a necessary consideration as part of these discussions – salary sacrifices, part time working, restrictions on dividends, as well as headcount reduction, will all continue to have a part to play. And accurately forecasting the business’ cash flow is crucial. Funders are going to look to robustly test these forecasts, because after the initial investment/deleveraging, lenders need to be confident that these revised projections show a more stable position.

Management teams have to recognise these realities and many have done so. The key is to establish whether or not there is still a viable business which can survive. That means properly analysing the financial and legal options left open to a business and that can often involve specialist advice, which in turn provides the banks with a degree of comfort that matters are being properly addressed.

It’s key that companies start this analysis while they still have options available to them and ensure they communicate properly with their banks and shareholders. Not an easy message to deliver but if you want to avoid having to give a worse one in the future, then now’s the time to take action.

Alasdair Freeman and John Kennedy are both partners at law-firm Burness Paull.