Liability management may be hot, but remember the business fundamental

The ability to simply tack on more debt isn’t really there anymore. And how do you handle impending maturities? How can you capture discount in the existing trading prices and secure additional funding? 

As a result, liability management is popular in the market today, but it is really a repackaging of what we’ve seen for a long time, with some new strings to its bow. Jockeying around the capital structure, moving collateral, improving priority, pitting existing creditors against each other all seem to be the name of the game but, in many cases, this is just extending maturities and re-carving up the existing business. 

Irrespective of the liability management strategies a business follows, the question must be: Will this make the company any better? 

If you are also raising new capital, this will come at a higher cost than previous years. Baskets, collateral, and structural flexibility may have to be given up, removing options for the future, and the rate of interest for this raise will likely be elevated. 

Critically, somewhere in this activity there must be a plan to drive change in the business and fix the fundamentals. Is there a robust business plan that underpins the affordability and viability of any new deal? The focus must shift from simply getting a deal done to long-term outcomes – and whether it can be refinanced at maturity. 

Liability management could be beneficial, but that transaction and process should not only be used to solve a maturity or liquidity issue under this new lease of life. It can’t simply become another iteration of amend and extend or kicking the can down the road. 

Management teams inherently have a bias towards optimism, inclined to shoot for the “stretch” goals. However, I would argue that this is precisely the time to be conservative and realistic. In golfing terms, they need to hit the middle of the fairway with high confidence of success for the shots that follow. 

Assuming that interest rates will continue to stay high, they must consider what can be done to improve their business, lower costs, or drive more revenue. The current environment increases the emphasis on operations, working capital management, and justified investment in capex. A business story of growth, capital return, and wise investment has never been more important. 

Now, within the current wave of legal gymnastics, loopholes are closing fast. If a company isn’t fixed, the next restructuring will be that much harder because there is no more room to manoeuvre. Each creative solution to gain more time and liquidity will ultimately make everything harder to unwind if the day of reckoning comes, and we’ll see more liquidations, quick sales, and forced auctions as a result, instead of thoughtful restructurings. 

Any interest rate reductions are unlikely to create an immediate windfall in the economy, so I expect this restructuring cycle to continue. Governments globally have their own high-wire act to tread – they really can’t put huge amounts of more money into the system without risking inflation increases again. They have to let this ride a little longer, which means we should see a longer, more natural market-driven restructuring environment, versus one that’s driven by a black swan event followed by government bailouts.