There is a growing number of businesses having to reconsider applying for support. Pre-Covid_19, human resources were a scarce commodity; no entrepreneur wanted to lose their precious human resources. With the announcement of NOW3 until July 1, 2021, the question begins to arise: will this make a company make it to the summer of 2021? Or is it a band-aid on the wound.
In nature, most animals die in the winter when food becomes scarce. People find that pathetic and want to start supplementing the animals. But nature is not a zoo and businesses are not subsidized workplaces. Chances are, for many businesses, food will still be scarce in winter and they will go into spring severely emaciated.
Peek Von Schükkmann specializes in distressed M&A."You must be busy" is a logical assumption in this day and age. The inflow of assignments has increased slightly, but I am doing more transactions. I sold three businesses during Covid_19. Only one was a classic case of distressed M&A: excessive debt combined with low profitability and negative equity.
The other two businesses had (slightly) positive equity and were running around break-even. For all three, Covid_19 was the straw that broke the bucket of debt. Band-aiding, adding money from the holding company and applying for NOW3 and TVL could have been done. And then rolling over for three years and hoping the 2019 ebitda level comes back could also have been done.
Mortuary construction
When acquiring a struggling business, loss financing is a buyer's biggest fear. Covid_19 has magnified this fear. At the intersection of the fear of loss financing (the buyer) and determining the acquisition price (the seller), many distressed M&A deals go awry. Increasing working capital is more important to a buyer than a bag of cash for the shareholder.
I did both an asset and an equity transaction. In the asset transaction, I applied a mortuary construction: the healthy parts were sold and part of the debts (compulsory creditors) passed with them. The acquisition sum was used for a creditors' agreement and repayment of the seller's subordinated loan. The takeover was subject to the success of the creditors' agreement, because the buyer considered bankruptcy too disadvantageous. After all, if the creditors' agreement failed, bankruptcy of the mortuary would follow. Not so exciting, by the way, because the transaction was well-founded and no creditor disadvantage took place.
Creditors
Persuading creditors in a private or forced settlement is always a difficult task. Covid_19 has brought a surprising turnaround in this. Many creditors today would rather choose one bird in the hand than ten in the air. Persistent news coverage of the sharp rise in bankruptcies, lower liquidation value asset returns and reluctance among credit insurers reinforces this.
In equity transactions, the purchase price was satisfied by issuing new shares. In which dilution created the new buyer 60%/seller 40% ratio. The transaction took place subject to the success of the debt restructuring. Underhand or through a moratorium? It became the former. But it can be simpler, by applying the WHOA (read my white paper on this at www.pvons.nl).
WHOA
In fact, WHOA will prove to be an excellent tool to do distressed M&A transactions. Contribution of new equity and simultaneous debt restructuring. With a higher return to creditors than in bankruptcy (the reorganization value) and a minority interest for the seller in a future healthy company.
For a distressed asset transaction, by the way, WHOA is less suitable. This is because the reorganization value in the trailing company does not arise; after all, it quits or dies. But the WHOA did set new limits on the value of a claim against an insolvent company in the run-up to a final bill during Covid_19. Indeed, in the current era, for many businesses, such a claim is worth no more than the value of the claim in bankruptcy. And that gives the application of debt restructuring in these times a greater chance of success.
