In our previous post, we outlined the urgent need for businesses to refresh their profit and cash road maps, due to the unprecedented levels of disruption during the pandemic leaving balance sheets stretched and in need of normalisation.

With an optimised profit and cash outlook in place, attention can turn to reviewing the funding strategy, establishing the funding need, debt capacity and parameters to identify a Plan A and Plan B to deleverage moving forward. This can be achieved by following three key planning and assessment steps:

1. Establish the funding need and any equity gap
It is critical to understand the target balance sheet that you need to achieve under your current lending agreements. By comparing forecasts to covenants, it can be established whether any profitability (leverage covenant) and/or cash (liquidity covenant) gap exists and whether this will be recovered in time. If a gap is identified in the plan, the size of the gap and the speed at which it is eliminated (if at all) needs to be understood to assess the seriousness of the issue.

To assess refinancing options, policies and objectives regarding debt levels, liquidity requirement and cost of capital must be considered and aligned upon, after which the debt capacity of the base and enhanced plans can be assessed. This will determine the size of any equity gap that would need to be met from new money (non-debt) or cash actions to facilitate a refinancing.

2. Assess deleveraging options and determine Plan A and Plan B
Here, the internal and external funding options available are determined. When considering internal options, leadership teams must ask themselves if the base plan is expected to be covenant-compliant or whether amendments to terms will be needed, alongside whether the enhanced plan, or parts of it, avoid this need. It should also be clarified whether existing stakeholders are supportive and would provide new money if needed. External refinancing options should then be outlined – whether full or partial – with an honest appraisal of how deliverable these may be.

Comparing the internal and external options to determine the Plan A and Plan B deleveraging strategies and associated returns to shareholders can then be completed. It’s also important to set the parameters of a high-level contingency plan (typically a restructuring or a divestment), should these strategies not be supported by the current stakeholders.

3. Develop the implementation plan for the deleveraging strategy
Reverting to any identified cash and profit improvements, the steps and timetable to deliver these should run in parallel to the funding options included in the deleveraging plan. For internal options, a plan should be developed for stakeholder engagement to build support for the deleveraging plan, including the cash and profit elements, while a restructuring plan will be needed if facility agreement amendments are required.

For an external funding injection or refinancing, funding types and parties to approach should be identified, alongside a timetable for activity. There are a myriad of options in the market that need to be considered, from straightforward bank debt to credit fund and alternative debt, as well as different forms of equity. At the current time, the funding market is constantly evolving so it is important to have an up to date understanding of what is appropriate for the situation at hand. It should also be determined whether it is necessary to dual-track Plan A and Plan B, which is typically necessary if outcomes remain uncertain or time is limited.

In our final post of this series, we will move to implementation, considering the many factors that will drive your de -leveraging strategy timetable.