The restructuring of corporate debt represent a significant change in the financing of SMEs, delaying novated debt maturities, incorporating additional financing or financial instruments needed to facilitate the development of the ordinary course of business. Now this plan of refinancing and debt restructuring must be accompanied by an action plan by the SMEs on the operational management of its activities.
We have to consider the option of a good debt refinancing is always preferable to bankruptcy. However, a bad refinancing may end in a bankruptcy leaving the company in a weaker situation that could have had with a well-planned contest.
Although not all refinancing processes are exactly the same, one could say that in all the following stages are always present:
1. The development of a document by the SMEs to present to financial institutions: This document must collect the viability plan that has prepared the company, which shall include, inter alia, the following:
1.1. The business plan of the SME. Its purpose is to present the economic, corporate and financial situation, prospects of its business model and future projections that support the refinancing proposal is to be performed. It is essential in the process of refinancing the development of a business plan setting out the following main aspects:
a) Presentation of the company (brief history, current shareholders, corporate organization and personnel and identifying the scope of refinancing).
b) Description of the business of the company (market analysis, description of their products, production facilities, channels and outlets, competitors and major customers and suppliers, and force analysis and business opportunities-SWOT).
c) Analysis of the economic and financial situation:
- Key figures: balance sheet and profit and loss: Study of the evolution of these magnitudes in recent years.
- Current status of the debt: Detailed description of the debt instruments are there in SMEs, detailing the financial institution, the interest rate quotas.
- Financial Projections: Description of how it generates the cash flow of the company. We must make projections of cash short (monthly detail the likely trend of the treasury in the next twelve months) and projections of the income statement for the coming years and, you net cash flows that generate this account results each year.
d) Feasibility Plan:
- Description of the measures taken by the management of the company to resolve the current situation of the company.
- Description of the main factors on which the business plan is based.
- Financial Simulations: short-term projections of cash flow of SMEs.
- Proposal for refinancing: Description of the financial needs of the company for the coming years, based on simulations and financial projections, and the proposed refinancing of debt raised by the SMEs to meet their needs
- Exhibition of the assets that the company has to ensure refinancing operation.
1.2. The details of the financial debt of the company subject to refinancing.Breakdown of the capital of the debt, interest rates and maturity of each debt transactions that SMEs have contracted with each bank.
1.3. Complementary to refinance the debt measures: Next to this the debt refinancing, the company must also take additional measures such as negotiations with suppliers and management of credit balances with public administrations.
a) Providers: The company must select the suppliers to consider strategic and those who accumulate more debt and negotiate with them improvements in payment or deferrals accumulated unpaid balances.
b) Government: Society must begin a process of postponing the debt with public admnistraciones.
It is essential that SMEs believe in the viability of their business and to be supported by banks and suppliers must present a solid plan and demonstrate their confidence in the plan presented.
In addition, financial entities that actually calls for support for the proposed refinancing, frown that SMEs expand its strategy to restructure debt to other creditors, because it means that not only are they who are supporting the company.
2. Presentation of the business plan and the proposed refinancing to financial institutions. It is the initial refinancing proposal that the company brings to the table in a joint meeting with all financial institutions concerned in the process of refinancing. It is the first meeting with all financial creditors, touchdown, which is important to invite and involve the rest of creditors, regardless of the level of participation that have on total debt, so they do not feel marginalized .
2.1 Debt Analysis: You need to know what the banking pool of SME debt and how debt is distributed among credit institutions. Must take into account:
- Number of companies that constitute the banking pool and type of entity.
- Distribution of debt from each financial institution, to know the risk they take each.
- Debt situation (provisioned or not).
2.2 Type of financial instrument: It is necessary to take into account the repayment schedule to predict when an unpaid fee may go into default; and the guarantee given to each instrument.
2.3 Company strategy: In the process of negotiating the proposed refinancing, the company must submit an initial strategy:
- Depending on the composition of the banking pool and distribution of the debt, the company will raise a collective or individual negotiation.
- The business plan must be aggressive in reducing costs and generating cash flows and little optimistic sales improvements.
- Set deadlines, improved conditions or take off depending on the cash flows generated in the business plan.
- Consider making capital increases, either by shareholders or new others.
At this point the SME has had to decide on the strategy that will follow regarding their obligation to continue to meet the schedule of regular payments on existing debt or, on the contrary, they will notify the entities that disrupt this timetable up the conclusion of the refinancing process, successfully or not.
2.4. Proposal for refinancing: It is necessary to find a balance between the interests of debtors and creditors. The interest of SMEs is the viability and continuity of the company and thus safeguarding your investment and equity.For financial institutions it is to ensure the recovery of the financing granted.
Analyze the proposal is key refinancing from the individual point of view of each financial institution to see how it fits with the characteristics of debt and position in the pool, so that possible approval of the proposal by the respective committees risks.
a period called “stand still” (standing) in which the parties, SMEs and financial institution, undertake not to take any action during the period established, which might prejudice the opposing party is initiated. Agreements on Principles Governing the parties for the duration of the refinancing process are adopted.
3. Trading process: Meetings where the proposal is discussed refinancing all financial institutions are held. In many cases, these meetings comes the designated head to plan the timing of this process and deepen financial institution negotiations.
4. Document “Term Sheet”: A document the main aspects of the agreements reached between the company and the financial entities are collected is made.You may be referred to as the draft contract refinancing in which the following main aspects should include:
- Structure and conditions of the financing.
- Guarantees of operation.
- Calendar of disbursements and repayments.
- Causes of early maturity.
- Covenants on assets.
- Ratios margining.
- Fee structure.
- Obligations of the company.
- Supplementary Agreements.
- Instrumental arrangements.
5. Definitive Agreement: The contract refinancing and restructuring of corporate debt definitive of writing, from “Term Sheet”, the same is signed and raises public.
The contents of a contract for refinancing are usually the following:
- Reason that led to the current contract, with reference to the original contracts that have been subject to refinancing.
- Definitions and interpretations of general and financial terms used in the contract.
- Conditions of each of the financial instruments: import, distribution, duration and maturity, availability of funds, amortization, interest …
- Provisions common to all financial instruments (defaults, commissions, payments …)
How are you refinancing operations of debt are usually long and complex process, which must be given unexpected situations occur solution is key, in my opinion, involve legal and financial advisers, prosecutors in such refinancing to support the management team who bring experience with similar operations and which contribute to speed, transparency and confidence in the whole process of refinancing with financial institutions and major creditors (suppliers and government).