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The eight factors that should be driving your deleveraging timetable

The need for businesses to implement a deleveraging strategy is gathering pace, as Government support measures taper down and lenders, investors and other key stakeholders look for robust plans for sustainable growth to keep their confidence levels high.

As discussed in our previous posts, the extreme overleveraged positions that many companies find themselves in after such unprecedented levels of borrowing should be driving a sharp focus on optimising profit and cash, as well as a refresh of funding strategies to identify the conditions and timetable for initiating a deleveraging plan.

In our experience, this timetable will be driven by a number of time-sensitive factors, which will of course differ from one organisation to another, but all constitute the key considerations in determining when and how to act on deleveraging strategies.

1. Buy-in to the business plan

Implementing or clearly mapping out profit and cash optimisation opportunities will provide stakeholders with the essential information they need to quickly build confidence and buy-in to your plan. Reaching this milestone will also buy time, which in turn will greatly contribute to improving the chances of overall success.

2. Going concern assessment

Businesses need to demonstrate positive committed liquidity for 12+ months as part of the audit process (potentially at half-year, as well as full-year). 

3. Liquidity headroom

While there are signs that recovery is under way, the macroeconomic events of recent weeks mean that maintaining adequate liquidity headroom is advisable, given that post-COVID uncertainty seems set to be with us all for some time.

4. Maturity dates

It is best practice to complete a refinancing 12 months before maturity dates arrive, which means starting a process 18 months out.

5. Debt terms

Debt facilities raised during the height of the pandemic may have sub-optimal cost, encumbrance or other terms. If there is a likelihood of being subject to early prepayment penalties, refinancing at the earliest opportunity is critical.

6. Government restrictions

Certain tranches of debt may have Government restrictions attached, such as dividend policy and executive pay, and businesses may wish to refinance debt to remove these restrictions.

7. Supply chain

Supply chain disruptions are already prevalent globally and could be exacerbated for businesses should suppliers and customers be monitoring an organisation’s credit rating, liquidity or performance covenants.

8. Timing of growth opportunities

To take full advantage of the recovery, funding may be required to target investment and M&A situations. As a result, funding will need to be in place early for this in order to move fast when opportunities present themselves.

Debt facilities raised during the height of the pandemic may have sub-optimal cost, encumbrance or other terms. If there is a likelihood of being subject to early prepayment penalties, refinancing at the earliest opportunity is critical.

Tags

balance sheet, disruption

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