15 April 2008
A bank is a place that will lend you money if you can prove you don't need it. Bob Hope
If you are reading this article, and your rental company has run out of cash and cannot pay its creditors, especially the employees, you might be too late! However, if you are worried that you might soon run out of cash, there are many strategies you can use to minimise the impact, and maximise the help from your creditors, especially your banks.
Growing rental companies are usually cash–hungry, especially if they are building rental fleet. Many rental companies find that nearly all their costs are fixed, especially a young company that has a great deal of equipment under finance. This results in quick increases in profits with small utilisation or price movements. Conversely, if rental rates drop or utilisation goes down, cash can start to flow the other way quite quickly.
If almost all a rental company's equipment is under finance, then cost cutting is difficult. Many rental companies pay even more than half their revenue out as debt service, including lease and loan repayments, whether or not the equipment is in the yard.
Debt Restructure Vs. Cost Cutting If a company runs out of cash, invariably the owners will consider a combination of cost cuts and restructure. As we will see later, certain cost cuts will probably be a requirement of the banks as a condition of accepting the restructuring plan. However, getting your banks to give you some breathing space may be much easier to do then getting rid of half your employees or closing half your depots, and indeed have larger temporary positive cash flow impact with less permanent damage to the business. The powered access rental industry, for example, is well populated with companies where restructuring seems to be an annual event.
Is The Cash Flow Problem Temporary Or Permanent?
Before considering a debt restructure, the owners of the company need to ask a few hard questions. These consider whether or not the company can, and indeed should, recover.
Or, to ask the question another way, is the company worth restructuring? I get many requests to help restructure companies, when the underlying business is based on equipment rented into a very crowded market, at low rates, with lots of damaged equipment, and huge bad debts.
Permanent Problems That May Need More Than A One–Time Restructure Are:
• Exposure to an overcrowded market
• Rental rates that are low and not getting better
• A business plan that never made sense in the first place – Some rental companies can only pay their equipment finance with 6 month no payment terms from suppliers, or overvalued trade–ins
• A company that has inadequate capital for its growth plans
Temporary Problems That Can Be Fixed By A Restructure, Formal Or Informal, Include:
• A one–time, large bad debt write off
– If this relates to multiple customers, watch out, your customer base may be beyond repair
• A new shipment of equipment that arrived late, or during the wrong season
THe Author: Jeff Eisenberg has spent ten years in the rental industry. He worked for Genie Financial Services, providing finance for large and small rental companies all over the world, and since 2000 has occupied senior positions in a number of UK–based rental companies. He now runs Claremont Consulting, a company he established in 2004 to advise rental companies, finance companies, private and institutional investors and equipment manufacturers. Jeff can be contacted on firstname.lastname@example.org or Tel: +44 (0)7900 916933.
• Fire, theft or other catastrophe
• Theft by an employee
• Walk–out of part of the management team
• Exposure to a boom and bust market segment
(like telecoms in the last five years) – If your exposure to one volatile market segment is too high, however, this might be an un–solvable problem
In Nearly All Countries, There Are Three Basic Types Of Debt Restructure.
• The informal restructure
• The formal (or enforced) pause and restructure
– This includes Administration, Company Voluntary Arrangements
• The liquidation and start–over Sometimes a company's cash situation means it will go through all three as steps in order rather than options.
The Informal Restructure
Perhaps the rental company needs a “pause to catch ones breath” in cash terms. In some sectors, such as powered access rental in several European countries, perhaps half the companies over five years old have had an informal restructure.
The informal restructure will ideally start as a written proposal – which will look similar to a business plan. The proposal must be sold to the banks, just like the initial proposal for the loan or lease when it was initially agreed.
Keys To A Good Proposal;
• Say “I'm sorry.”
– An apology (for not hitting the agreed forecast) will go a long way. – Bankers can seem cruel and may want to see that the directors are suffering, or at least taking the situation very seriously. – Don't take your top customers golfing to Spain, go on an expensive overseas holiday with your family, or take delivery of that new Ferrari during the restructuring process. (Yes, all these have been seen in access rental companies, during restructuring, even while eliminating jobs, in recent years.)
• Communicate well and often.
– Phone the person at the bank who agreed the loan or lease before you fax it to them. Who at the bank sees the proposal, and how it is sold internally, will often be key. – Many if not most of the banks will want to meet with the directors before agreeing anything. – Some leasing companies will want to inspect their equipment – but be sure they're not going to repossess it rather than inspect it!
• Demonstrate that the management still has the business under control, understands what happened, and has the ability to fix it.
• Produce new financial projections, especially cash flow, showing cost cutting (if applicable). Some banks will want to see weekly rather than monthly cash flow forecasts.
• Consider getting the proposal written or reviewed by an accountant or consultant. – Careful, though, if a professional accountant tells you the business is in trouble, you may have to follow their advice and put the company into Administration, depending on which country you are in.
• Provide the banks with whatever information they ask for as quickly as you can. – Show whether or not the company's taxes (including VAT, etc.) are up to date, or that a pause plan has been agreed with them as well. – At this point, it is difficult for the banks to accept that anything is confidential, or that the management does not have all figures available.
• Agree at the beginning of the re–structure how often the banks will have updates – some may require information more often then once per month.
What Will Banks Accept, And What Won't They Accept? Here Are Some Rules Of Thumb:
• In the equipment rental industry, it is rare that an informal restructure will last as long as six months.
• Four months of half–payments on finance agreements is easier to sell than two months of no–payment.
• Interest only payments for a few months are much easier to sell than no payments. Even a tiny payment each month is easier to sell.
• Some banks will let the company add the skipped payments (or half payments) onto the end of the agreements, while some will want this much sooner, even in the subsequent months.
• Show that the company has already borrowed as much cash as it can: – Unencumbered equipment has been refinanced or sold – The overdraft facility or loans are at their maximums – The company already factors its invoices (or has some other loan against them, such as invoice discounting)
• Show that the directors/owners are taking some pain: – A salary cut (or pause), or, – Invest some cash, or, – Pledge additional collateral – Perhaps provide a personal guarantee to cover the bank's extra exposure during a payment pause
• Treat all banks the same
• Go to the friendliest bank first, such as one that has its lease underwritten by an equipment supplier. – It can be much easier to convince the more difficult banks that everyone else has already said yes – banks often act like sheep.
• Put a plan together that you know you will achieve; most banks will let you restructure only once.
Formal Restructure And Administration Almost all countries have a procedure which will give a company a court–enforced pause from legal actions by creditors to re–organise itself – or to sell some or all its assets. This legislation is quite different country by country; both in its intent and its practicalities.
Germany The Administrator is appointed by the court, usually for an initial three months. The Administrator makes a plan, on which the creditors then vote. The creditors' votes, across unsecured and secured creditors, are all–important. The Administrator assumes the day to day running of the company; but generally does not sell off assets or the company before a creditor vote, as can happen in the UK.
UK The Administrator is nearly all–powerful. The floating charge holder (usually the bank providing an overdraft or factoring facility) can choose the Administrator, who can attempt to run, liquidate, or sell the company with the chief objective of maximizing money returned to unsecured creditors.
The Administrator can even sell some or all of the company's assets on the same day as the Administration starts to the previous management/shareholders, in exchange for whatever sum he or she deems will be the maximum achievable – even without marketing the company or its assets to anyone else. This is known as a “pre–packaged” Administration. There are cynics who believe that this puts the old management's interest (and the Administrators, who can charge copious fees) over those of the creditors, however the Administrator is rarely challenged. We have seen a few of these in recent years, especially – again – in powered access rental.
If the Administrator in any of the above cases sells the company, it may be to the current directors/shareholders. In France and Germany, the creditors vote on this, while in the UK essentially only the Administrator has to be convinced.
In all cases, the Administration costs an amount that quickly builds. Administrators at Universal Aerial Platforms – a company close to my heart – ran up over £460000 (€680000) by the time the creditors meeting took place, around two months after the Administrators were appointed. Perhaps this sum would have been enough money to rescue the company, rather than enriching a top accounting firm?
In conclusion, before attempting any kind of restructure, take advice, since hostile banks and creditors could put everything at risk. If your cash flow problem is temporary rather than permanent in nature, perhaps you can get some breathing space informally, which will probably be mostly forgotten after a year or two. If not, serious and expensive negotiations with either your creditors or quick moves with the right Administrator are called for.