05 Feb 2021

Restructuring starts with the left side of the balance sheet


The conventional view is that banks and other moneylenders hold the key to bringing a burning platform back into a safe haven. In reality, they play a role in the finale at best. If you’re looking for a real solution, start on the left-hand side of the balance sheet and the company’s cash-generating capabilities.


‘Money is important, if only for financial reasons.’ This quirky observation by filmmaker Woody Allen may also help us in getting the focus right when it comes to restructuring operations. 


If the media are to be believed, the key to finding a solution lies in attracting fresh capital or securing new loan contracts with banks. There are, however, only very few success stories in which a capital injection genuinely nurses a company back to health. 


Obtaining more cash to weather a severe storm could in fact even create perverse incentives. Entrepreneurs who keep being let off the hook by their creditors are prone to becoming ‘lazy’ and less on their toes decision-wise. The fact that governments liberally and without setting too many additional conditions provided companies with financial support at the start of the COVID-19 crisis was a good thing. The fact that banks and other financial institutions were prepared to extend credit facilities was, too. Such support was necessary if only because of the sudden impact. 


But there is a disadvantage to this approach. First of all, the debt position of many companies increased at a time that there was no prospect (yet) of recovery of earning potential. That can be a deadly combination. Secondly, it causes the management to focus primarily on the realisation of a financial solution while letting a focus on entrepreneurial solutions take the back seat.


It’s for precisely this reason that some venture capitalists – in ‘normal times’ – consciously adopt a spoon-feeding strategy, so called because the company receives capital in small increments, and not before certain milestones have been achieved, rather than one lump sum. Entrepreneurs may find that somewhat frustrating, but it can provide an incentive to spend money received in just the right way, for much is at stake if decisions are poor or the entrepreneur isn’t on the ball where execution is concerned.


Even in the case of companies that have gotten into severe problems, this is a fact of great importance. In many cases, the crisis is generated by the breach of bank covenants and the knee-jerk reaction is often to seek new capital. But that’s rarely the best solution. 


We may think back of an important case in the Dutch corporate history: the history of IT service company Getronics. The company was burdened by debt at the start of the 21st century, accrued through the acquisition of Wang/Olivetti, which was financed by bonds. The integration of the two companies failed miserably and the expected returns never materialized. The management saw no alternative but to convert the debt into equity. 

Another scenario was developed under the radar: selling salary processor Raet – a successful, money-making subsidiary that was relatively independent from the other activities and could therefore be sold off without a huge unbundling operation. Events unfolded in the deepest secrecy because the debt-conversion prospectus was still out in the market. Long story short, it worked. 

The experience at Getronics holds a valuable lesson for many other cases. Metaphorically speaking, it’s a good idea when tackling these problems not to start with the right-hand side of the balance sheet, which lists capital and debt, but the left-hand side, where you find

the assets, which together with the product and services portfolio form the basis for the generation of cash. 


Didier Simons shares his experience on restructuring in a series blogs for HERO. Simons is a partner at BOLD.





Didier Simons

Partner bij Bold Capital