Reprinted from Watt PoultryUSA

Debt restructuring isn’t just for companies in bankruptcy.  It can be a powerful financial move even for poultry companies with positive cash flow. 

Think your company is doing too well to consider restructuring the debt?  Donald Trump, with a net worth of $1.8 billion, is ranked the 110^th richest man in America by Forbes Magazine.  Concerning his intention to restructure the bonds outstanding on some of his casinos, Mr. Trump stated that “until we have a package (debt restructuring) that’s satisfactory, we’re going to withhold payment.”  The payment he was referring to withholding was a $90 million interest payment due on certain bonds.  He has the cash, but is seeking concessions on the debt’s terms before paying it.

Many food manufacturers – and perhaps a few poultry companies – are in a similar situation.  In recent months, sales have declined, profitability has shrunk, and uncertainty about future cash flows has increased.  Management sometimes decides to initiate a turnaround plan that will preserve cash.  They start to cut operating expenses including reducing staff, negotiate concessions from certain suppliers, reduce inventory and attempt to sell any excess assets.  All good initiatives, but incomplete.  Why not get your bank, bondholders or other note holders to also participate in the plan?  How?

Your company’s current cash flow weakness is your strength.  You seek to negotiate concessions from lenders in that ordinary economic times you would never be able to achieve.  But what exactly would a debt restructuring involve and how would it improve cash flow?

A debt restructuring plan must reflect the risks inherent in your company’s operating plan.  Such a plan should establish debt-service requirements that are consistent with the company’s projected operating cash flow and allow for the projected variability in operating results.  A debt-restructuring plan needs to:

If your competitors are well capitalized, then your debt-restructuring plan needs to anticipate some of these competitors’ possible strategic moves and project their potential impact on your cash flow, capital expenditure requirements and working capital needs.

In developing a proposed debt-restructuring plan, you need to consider all possible changes in the terms and conditions of existing indebtedness:

Interest Rate.  Generally, interest rates stay the same; however, you can negotiate for a reduction in interest rates if you are providing additional collateral or in cases of severe financial difficulty.  While the interest rate might not be lowered, you may propose to make a current payment on part of the interest expense and have the remainder capitalized.

Amortization. This is where minor modifications can have a major impact on cash flow.  The longer the amortization period, the lower the monthly cash flow payment.  Extending the amortization period on a term loan from three years to seven years reduces the monthly debt service requirement by 50 percent!  Often, loans are put on an interest only basis – no principal payments for a period of time, thus allowing the company the time to replenish its cash requirements.  Firm negotiations concerning modifications to amortization periods generally improve cash flow more significantly than changes in interest rates.

Maturity.  Lenders would prefer not to extend the time period they are committed to a borrower that is experiencing some cash flow problems; so often, unless the maturity dates are within the next six months, maturity dates are not extended.  That does not mean that amortization periods are not modified.  Maintaining the maturity date yet extending the amortization period just means that the debt will have a larger balance due at maturity than originally planned.

Collateral.  If you offer the lender additional collateral then they currently have, that strengthens your negotiation position in seeking concessions on interest rate reductions and modifications to maturity dates and amortization periods.  Often, there is no additional collateral available.  Then what?  Proceed forward with your debt-restructuring plan because most lenders easily recognize situations when no such additional collateral is available.

How to Present Your Plan

Why do banks agree to debt restructuring plans?  You need to negotiate with lenders from the following position:  Illustrate to them why the ultimate recovery on their loan will be higher under the proposed debt-restructuring plan then under alternative scenarios such as a bankruptcy proceeding or even a liquidation of all assets.  The stronger you can demonstrate that point, the easier it is to gain acceptance from lenders on your proposed plan.

What options do the banks have?  If they fail to negotiate an agreement on your company’s debt restructuring plan, they can foreclose on their collateral, encourage a sale of your whole company, or file an involuntary bankruptcy.  Yes, these are viable alternatives, but each one of those have significant risks to a bank, can be costly to implement, can lead to bad public relations in the local community and may result in lower economic recoveries than originally estimated.  A bank’s first choice is to work out a problem loan before resorting to other, riskier alternatives.

To increase the likelihood of a successful negotiation with a bank, start with demonstrating to them the economic advantages of your company’s workout proposal.  But beyond that, follow certain other rules.

Full honest disclosure.  Banks can deal with bad news about a company’s financial condition.  Worse than bad news is no news or incorrect information.  When information is lacking, banks assume the worst.  When the information provided is incorrect, that causes a banker to suspect all the other information provided to them by management.

Present a complete plan.  Detail what caused the current cash flow problems, what corrective actions management has taken and are planning to implement, and what are the quantitative and qualitative results of those corrective actions.

Develop a financial projection – one which illustrates the cash flow impact of the corrective plans and which demonstrates the company’s ability to make the debt service payments requirements included in the debt restructuring plan.  The only certainty about a financial projection is that it will be wrong.  But that is no reason not to do it.  The key issue with a financial projection is the detain in the assumptions used in developing the projection and demonstrating to a bank that you have considered the primary factors impacting the company’s economic performance.  It also illustrates the company’s financial ability to make the new debt-service payments that it is asking the bank to accept as part of the debt restructuring plan.

Share the pain.  When asking a bank for concessions, it strengthens your negotiating position if you have achieved modifications from other interested parities such as supplier concessions, reductions in management salaries or benefits, lower labor costs and perhaps deferred payment agreements on obligations due to other creditors.  Management initiatives that improve internal cash flow will improve your company’s negotiating position with its banks.  Such initiatives might include:  Implementation of stronger accounts payable and purchasing controls; reduction in the collection cycle; the sale of excess inventories; sale of excess fixed assets; and the consolidation and shutdown of facilities.

In certain instances, you might even consider proposing exchanging debt for an equity position in your company.  Most privately owned food manufacturers do not want additional shareholders.  Most lenders do not want an equity interest in a private company because of concerns on how do they achieve liquidity of their holdings.  Yet, in certain instances, the debt for equity exchange might be appropriate.  Consider the advantages of such and arrangement before dismissing this alternative outright.  One food manufacturer had raised second mortgage financing from a government entity.  Three years later when the company was experiencing some cash flow difficulties, he exchanged that debt for a 4.9 percent interest in his company’s common equity.  Eighteen months after the debt-for-equity exchange, his financial condition had improved and there had been a change in personnel at the state government agency that held the equity position.  He was successful in reacquiring the 4.9 percent equity interest for a dollar amount equal to only 6 percent of the total loan balance that had been converted to equity.

“Ask and it shall be given to you; seek, and ye shall find; knock, and it shall be opened unto you” Matthew 7:7.  The onus is on management of food manufacturers to explore all possible financial planning alternatives when their company’s financial performance is below par.  Examining the possibility of a debt-restructuring plan benefits a company, even if one is not implemented.  President Eisenhower said that the real value of a plan was not the plan itself, but in the planning process, because the process causes you to undergo a strategic analysis of your operations that that is normally not part of your daily management procedures.  As the marketplaces where food manufacturers operate suffer deteriorating conditions, management needs to ask the question, “Is my company a candidate for a debt restructuring?”

Roy S. Ryniker, President of the Reorganization Alternatives Group, Ltd.