A macroeconomic downturn hits a specific sector or spreads across the economy. Higher trade tariffs raise the cost of raw materials and diminish demand in overseas markets. Suddenly and unexpectedly, a company’s financial conditions can change, seemingly overnight.
Liquidity concerns emerge. Refinancing debt becomes more challenging as lenders back away from a company or an entire sector. A short seller or activist may become active in the stock, further complicating refinancing. An M&A deal falls apart at the last minute….
These are classic triggers of a “special situation” when a company finds itself facing challenges that threaten its ability to continue operating as a going concern and service its debt. What must follow are hard conversations as management, the board, and their advisors weigh restructuring actions such as balance sheet recapitalization and distressed M&A.
At Cowen, we have deep expertise in all aspects of special situations and restructuring – combined with industry expertise. Equally important, we work across the entire firm to bring the full weight of Cowen’s investment banking, research, sales and trading insights to every situation. For our clients, this approach means greater options and opportunities—elements that are critical when facing dire circumstances.
Taking the “Vital Signs”: The Proactive Approach
While each fact pattern is unique, there are certain bellwethers that indicate a company has become or is at risk of becoming a special situation. The most obvious element, and often the last, is the inability to service debt obligations (the definition of insolvency). But there are more nuanced signs, among them: increasing concerns by lenders around covenant compliance; wholesale resignation of board members; the sudden departure of the CEO or CFO; a change in the auditor’s “going concern” opinion; or significant short selling or activism in a public company’s stock. Such visible warning signs must be addressed immediately.
The greater the ability to predict potential challenges and consider alternatives quickly, the more options will be available. Companies that perform scenario analysis and consider downside “what ifs” are prepared for all sorts of potential eventualities. Delaying or avoiding discussions about the severity of a prospective situation, or pursuing options that are unlikely to materialize, will reduce both time and options as adverse events unfold.
Identifying a “Plan B”
The preferred course is to be proactive rather than waiting until there is an impending liquidity crisis or lenders are demanding immediate action. Proactivity becomes critical during periods of economic uncertainty. During macroeconomic downturns and recessions, there are fewer available buyers—and far more choices of companies and assets that can be acquired at “bargain basement” valuations.
The same thinking applies to debt refinancing. During periods of economic uncertainty or weakness, refinancing should be addressed as quickly as possible, even 18 to 24 months ahead of significant maturities. Delaying discussions will limit options as market participants will price in potential financial distress as the maturity wall nears.
While a company may assume it can refinance with its existing lenders, that is not always the case. Liquidity concerns within the company or elsewhere in the sector can result in lenders becoming reluctant or unwilling to refinance debt. Relationships alone will not suffice in difficult circumstances. Often the decision is not made by the relationship banker or portfolio manager but rather by centralized risk managers who set the lending institution’s risk tolerance.
To determine what a lender is likely to do in the future, look at its track record of handling past distressed situations. Is a lender known for being amenable toward forbearance on waivers (providing relief to the borrower)? Or has the lender called loans in the past to reduce its risk? With the increase in non-bank lenders such as business development companies (BDCs), direct lending credit funds, and collateralized loan obligations (CLOs), there is limited data available on their proclivities. Cowen’s special situations bankers have the expertise to advise C-suite leaders on the likely actions of particular lenders in order to build an action plan.
Another scenario is when a company engages in M&A to sell the entire operation or certain assets. What happens if the transaction falls through? Boards and management rarely consider this possibility, believing the chances are too remote. But deals can and sometimes do fall apart at the 11th hour. A well-organized plan should include multiple backup options, whether engaging in a distressed M&A process with other parties, monetizing some or all assets, or even Chapter 11. Additional options include preferred, convertible, or common equity issuance and private equity transactions.
Companies need to understand the “art of the possible”—and which options are most likely to be viable. When time is of the essence, company leaders cannot try to learn as they go; rather, they must rely on professionals with proven expertise. A strategic alternatives review by investment bankers who specialize in restructuring can determine the options for each special situation and identify which strategies are unlikely to yield results. The best restructuring advisors recognize that there are no “cookie-cutter solutions.”
The Cowen Advantage
Cowen’s restructuring expertise spans multiple decades. The deep institutional memory we possess is becoming rare among investment banks, boutique advisors, and commercial banks, alike. Cowen bankers have handled restructurings in all economic environments, including the 2007-2008 financial crisis, the dot-com bubble burst of the early 2000s, and macroeconomic recessions in the 1990s—and across multiple industries, sectors, and sizes and types of companies.
In addition to our long-term experience, what makes Cowen unique is our holistic approach. We believe fundamentally in teamwork and collaboration. Working across the entire firm, including with our industry teams and capital markets partners, we strive to offer the widest possible array of solutions to clients. In addition, as one of the leading market makers in distressed securities, our trading partners have unparalleled insights into how lenders and bond holders react to unfolding market forces. By channeling all these resources for our clients, we can provide 360-degree special situations advice to enable solutions to be devised and implemented. The result can be the most rewarding of all scenarios: helping save a troubled business and bring it back into the stream of commerce.
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