What is a restructuring plan and when would you use one?

Over the past two years, many businesses will inevitably have accumulated higher than usual levels of debt because of the impact of COVID-19. Debt and consequent repayments can put substantial pressure on cash flow and in some cases, the overall viability of a business. If this is a situation you recognise, there are options available for businesses.

In Australia, distressed businesses can utilise a number of formal processes set out in the Corporations Act - Schemes of Arrangement, Deeds of Company Arrangement (DOCA), Safe Harbour and also if eligible, the new Small Business Restructuring process.

These formal Corporations Act processes, will not be suitable in all circumstances and there will situations where it is more appropriate to utilise an informal restructuring plan without compromising creditors through the Corporations Act based insolvency process.

An informal restructuring plan is tailored to the specific circumstances a business faces and may take many forms including:

  • A compromise in the amount of debt
  • A refinance of the debt
  • A debt for equity swap
  • Resetting of covenants
  • Rescheduling debt repayments.

The main benefit of any restructuring plan is that it enables a business to identify the specific debt burden and restructure its balance sheet to release working capital into the business. A restructuring plan may also provide a sustainable platform for which new funds (debt or equity) can be injected into the business to fund future operations and growth rather than the repayment of existing legacy debt.

When would you use a Restructuring Plan? 

  • Where a Company’s underlying business is viable but the existing debt burden highlights a need for the balance sheet to be restructured
  • Where a Company has debt or other contracts that are particularly onerous or could impact the solvency of an otherwise viable company
  • Where a Company needs to create a sustainable platform for the injection of new capital for the future
  • Where a Company has an underperforming division within a group.

Timing of a Restructuring Plan

A key takeaway from business failures is that many were preventable, but management simply ran out of time (and cash) to develop and execute a restructuring plan. Businesses should have an eyes up approach to their financial obligations and understand the scenarios where risk of insolvency is present.

In Australia, many would argue that business restructuring is limited to Corporations Act based processes for companies facing imminent or likely insolvency. This mindset will delay businesses obtaining expert restructuring advice. The better view is that a restructuring plan is suitable for businesses identifying the early warning signs of distress so that the business can consider a broad range of solutions for different scenarios and ensure the business avoids insolvency. Our experience indicates that the earlier a plan can be established the more likely the outcome will be beneficial for all stakeholders, as it allows for more time to negotiate and implement the plan well before questions of solvency arise.

For a confidential conversation on whether a Restructuring Plan may be right for your business, please get in touch with your local BDO adviser.