Insolvency & Restructuring – a topic that is here to stay

We have seen in recent weeks how several companies have entered into restructuring or insolvency (liquidation) processes. Emblematic brands such as Fernandez Wood, Delta Constructora, among others, have had to take advantage of the new Law No. 20,720, Insolvency & Re-entrepreneurship. This law (very accurate copy of the bankruptcy law of the USA), allows increasing the number of companies that are restructured and continue with operational remittance, and thus avoid an asset liquidation process (in which the company disappears).

We have also observed processes of “exoneration” of the Financial State Case of Clínica Las Condes, where apparently there were unrecognized liabilities, bulky inventories and excess assets in accounts receivable, notoriously affecting the results of previous years, the credibility of the company and reducing the market value of the company.

The above is part of a phenomenon that will become increasingly normal and frequent. The probability that companies enter a restructuring process can reach more than 80% in the next 5 years. The above implies that 4 out of 5 companies in Chile will have some deterioration in their operational & financial performance, affecting the sustainability of the business and putting employment sources at risk.

This “new reality” has several causes, but basically they can be divided into two; 1) external phenomena (regulatory change, increase of competition, technological disruption, among others) 2) internal phenomena (management capacity, lack of control and directly fraud or crime in information manipulation, among others).

A restructuring plan is a complex, intense and exhausting process. It is essential to quickly define if there is economic viability of the company that is in trouble, in a way that justifies the effort of a restructuring. Ideally, it is necessary to seek expert advisors on restructuring issues and design an action plan that has a short-term impact on the company’s results. At the same time, a team must be built, under the leadership of a CEO or CRO (Chief Restructuring Office), who will be in charge of executing the transformation.

The action plans are divided into 4 areas; 1) strategic restructuring (is it necessary to modify the business model of the company?); 2) financial restructuring (must we renegotiate the liabilities?, Do we have to sell non-core business assets?); 3) operational restructuring (reduction of operational expenses and overhead, efficiency in productivity, etc.); and 4) organizational and cultural restructuring (retain talents, create a culture of results, enhance leadership, empower the team, among other actions).

In conclusion, we believe that the insolvency & restructuring processes will be increasingly frequent in Chile, which means that together with new laws, specialists (lawyers, accountants, engineers, consultants, etc.) must be trained to maintain and create value in a situation of reorganization.

 

Ernesto Solís

Senior Partner

Fix Partners Consulting

 

Member of TMA (Turnaround Management Association)

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