DealCast Episode 4 | KPMG | CA

How to capitalize on transactions in a volatile market

DealCast Episode 4

Webcast originally aired on Tuesday, November 22, 2016

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President, KPMG Corporate Finance Inc.

KPMG in Canada

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Summary:

Canada is in a period of increased volatility for companies and their future prospects and current valuations. In the Canadian case, a prolonged slump in world petroleum prices has reduced the financial viability of not only firms operating in the country’s oil patch but also downstream enterprises, such as service companies, and others in heavy manufacturing.

On the buy side, acquirers have benefited from a low cost of capital and the episodic overvaluation of their share price compared to potential targets.

As a result, more firms are looking to or have entered into restructuring proceedings while a growing number of companies on a more solid financial footing are seeking to pick up assets at distressed prices.

Restructuring

In past periods of corporate upheaval, entering into bankruptcy or restructuring carried a whiff of failure. Underperforming executives were seeking court protection to save what few remaining assets they had left.

In fact, the Companies Creditors Arrangement Act (CCAA) and other similar procedures now give the restructuring entity a chance to maintain its business with an eye to continuing to operate or at least maximize its saleable assets.

The same proceedings give potential buyers a formalized process by which they assess the company’s worth and allow them a chance to bid on available corporate assets.

Once the legal clock starts ticking, however, buyers also face possible pitfalls in the process that will need attention. That is because CCAA and the other laws remove many legal barriers companies usually face in a normal auction process.

Management in distressed situations is looking at either operational or financial restructuring. Usually, the company enters into such a radical configuration because of extraneous shifts, such as new competition in their markets or because of adverse events, like a liquidity crisis.

In general, management has lost the confidence of creditors that it can handle these negative circumstances. Then, the bankers or other lenders begin advocating for big changes in the C-Suite to protect company assets that can be sold.

For ailing firms, the two main legal protections are the CCAA and the Notice of Intent under the Bankruptcy and Insolvency Act.

Often, large restructurings fall under the purview of the CCAA because the act offers flexibility for the debtor and also provides short-term creditor protection.

In this case, next moves could entail:

  1. Selling assets to generate cash flow;
  2. Developing strategic alliances to improve corporate efficiency, and;
  3. Merge with another firm to develop greater market share or revenue diversification.

Cash as King

Most importantly, restructuring companies need to horde cash. Basically, the more money you have, the more options you have in dealing with creditors and other claimants. What becomes crucial is implementing strategies to maximize cash without damaging the business through excessive asset sale.

That is one area in this process where advisers come in handy, people who have had experience in working with distressed companies and opportunistic buyers to ensure both sides come out with some measure of satisfaction.

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