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Act now to recover: know your financial restructuring options and manage your stakeholders

Reto Brunner Partner, Advisory, PwC Switzerland 14 Jan 2021

Despite the options available to help Swiss businesses weather the initial COVID-19 storm and signs that the economy isn’t doing as badly as expected, companies shouldn’t be lulled into a false sense of security. Now’s the time to address any financing issues intelligently and proactively to assure the immediate stability of your business. But it’s also the time to think about how you need to transform to remain profitable and financially viable in the long term. 

We in Switzerland often like to think of ourselves as a special case. Sometimes, as in the present crisis, it turns out to be true. But it’s not always an advantage. In March, April and May, after COVID-19 first struck, it was impressive how quickly and unbureaucratically support was made available in this country. Thanks to this aid, combined with substantial cash reserves in some cases, many companies were able to bridge the immediate gap and weather the first few months quite well. This may have lulled some of them into a false sense of security.

There was a lot of refinancing and renegotiation of covenants in May and June – on the assumption that there would be no second wave. When the second wave did actually materialise, some of the companies were caught on the left foot and were hit harder as a result. The short to medium-term scenarios have changed, and many now face the prospect of being unable to meet terms based on a lower level of volatility in the future and more optimistic EBITDA, equity ratio and net profitability assumptions. Companies that won’t be able to meet these covenants by mid-2021 now face the challenge of renegotiating with banks, shareholders and other sources of funding – even if their liquidity is adequate. This is absorbing a lot of management attention. Businesses have to be smart and proactive about how they handle this challenge. At the same time they have to avoid being distracted from other matters crucial to their longer-term prosperity.

Different businesses, different challenges

Having said all this, I see two broad categories of company in Switzerland, each of which faces different challenges in the current situation.

Small businesses such as grocery stores, health boutiques, restaurant and hotels have been harder hit by the various lockdowns than large companies with a global footprint and less reliance on consumption. Many of these small players are fighting for survival. Not knowing how quickly revenues will recover, they have to (or have had to) ask some tough questions about whether it’s worthwhile to continue and whether the support available will be enough for a sustainable solution. These businesses should be seeking all the help they can get in the form of COVID-19 loans, non-reimbursable (à fonds perdu) contributions and short-time working.

Medium-sized and large companies, by contrast, usually have a more highly developed financial or treasury function, plus more mature financial competencies and relationships with banks and shareholders. Most reacted well in May and June once the first wave had abated. The challenge for these businesses is now more about getting funds and renegotiating terms. But they shouldn’t just be focusing on survival in the short and medium term. This is the time for them to start adapting their business model not just to a slower recovery, but also to the very long-term impact of the crisis. In other words, it’s not enough to sit it out. Larger companies should be recognising the need to transform and set about having a sustainable model in place to assure profitability in the long run. 

How do you stay in control?

My colleague Gavin Stoner at PwC in the UK recently wrote a short article with some good, clear advice about how to keep control under the sort of financial stress companies find themselves in presently. Despite the slightly different situation in Switzerland, the advice holds good here as well, so I’ll recap briefly on what Gavin recommends:

  • Be alert to your situation. Heed the warning signs, understand where your company stands on the corporate recovery curve, and make sure you take the right action before the situation slides into distress and crisis.
  • Act early. Take steps while you still have control and before you start breaching contracts and covenants. At that point your options will be severely limited, because external stakeholders will have a say in the action you take.
  • Take external advice. Explore your options. Even if you don’t commit to the recommended course of action, you’ll gain an independent perspective and have unhelpful assumptions challenged.
  • Engage early and often. Managing communications with your stakeholders will give you time and space – provided you do it thoughtfully and understand what each group needs to make the decisions you’re asking of them. This might also be a good time to consider new stakeholders and sources of finance.
  • Keep on the front foot. This means being proactive and thinking ahead. Merely reacting in a situation like this can cause a lot of distress and be seen as a sign of weakness and lack of foresight. Make an active plan to bridge the covenant and assess the different scenarios and sensitivities so that you’re a step ahead if mitigating actions are required.
To sum up: act now to cope efficiently with the crisis, but don’t neglect the long term

Now I’d like to return to my point about not allowing yourself to be distracted, however much attention coping with the crisis requires. COVID-19 has been a wake-up call, and in many respects has accelerated disruptive developments that are already changing the way we do business. It’s important to address the issues efficiently, intelligently and sensitively to weather the immediate challenges. But especially if you’re a medium-sized or large business with a more wide-ranging business model and more extensive structures, this is the time to be considering how to transform to remain profitable once this crisis is over – and in the event that other crises strike in the future.

Contact us

Reto Brunner

Reto Brunner

Partner, Advisory, PwC Switzerland

Tel: +41 58 792 14 19