Opportunities in the credit crunch
Companies can benefit from current financial downturn by changing tack
THE CREDIT CRUNCH in global financial markets continues to be a hot topic worldwide. The current economic turbulence is resulting in a harsh environment in which to do business and almost all companies are feeling the crunch. Current financial and strategic issues being faced by companies throughout the world due to the downturn include: • Restricted credit (difficulties in raising new finance from banks and far higher costs involved in financing or hedging). Short-term liquidity concerns. Asset price falls. Hostile takeovers to defend. An increase in debtors’ days and bad debt writeoffs. Pressures to divest or close underperforming divisions. Workforce management and reductions in head count. Reputational and brand risk. General ability to operate. While legislators, regulators, financial institutions and other stakeholders are taking steps to produce some stability in the markets, the effects of the downturn are going to be felt for a long time and it remains a fastmoving and evolving story for all companies in all industries worldwide.
In unstable times opportunities also arise for those companies prepared for the downturn or those with the ability to change tack relatively quickly and take advantage of unexpected opportunities. Now is the time to assess competitors for their strengths and weaknesses and realise strategic opportunities by buying assets from distressed situations or taking over companies unable to operate in the current environment or which, due to the crisis, have lost asset value but have the ability to rebound. Reviewing a company’s supply • • • • chain efficiency and the ability to restructure toxic or distressed assets or operations is essential in identifying takeover opportunities.
Now is also the time to reassess strategic plans and update your business model, perform comprehensive risk assessments and put in place all necessary steps to ensure compliance with risk policies. Though protecting your strategic talent is crucial, the opportunity arises to take advantage of a large talent pool that has and will become available in the market place.
From a financial perspective in the current environment cash is king, and liquidity and availability of affordable credit are high on every company’s list of issues. Whereas tax is largely seen by companies as a cost of doing business and not an area of opportunity, reduction in tax costs due to restructuring or simply further compliance can result in an unexpected but very welcome cash injection into the business. Tax can be used to help refinance your business internally, by tightening up on compliance or engaging in tax efficient restructuring or, externally, where a third party’s involvement is necessary.
Reviews of inter-company flows where, for example, there are dividend blocks (repatriation of funds) or cash/tax leakage can have an immediate effect on your cash position. Loss utilisation and realisation of tax refunds, strategies to implement early recognition of VAT cash flows and reductions of customs duties for big multinationals by virtue of restructuring supply chains can be critical to a company’s survival through the downturn. Previously considered ideas of debt factoring, utilising tax incentives and other tax benefits should now be reconsidered, assessed and where viable quickly implemented.
Where the above internal funding isn’t sufficient, tax-efficient refinancing with external parties, realising cash through sale and lease-back arrangements and acquiring debt at a large discount can be used to provide the needed cash injection into your business. Cross-border financing structures utilising lower costs of finance in other jurisdictions and structuring to reduce the tax cost and hence the finance costs are available and should be considered.
If you do decide now is the strategic time to sell underperforming assets or close noncore or underperforming divisions, you need to carefully review all costs involved in such an exit or rationalisation as, if not controlled efficiently, those can be prohibitive and reduce the benefit you expect to achieve. Review your entire group structure to ensure the supply chain remains efficient and that an intended closure doesn’t block or reduce cash flows, release unexpected deferred tax obligations or trigger new tax liabilities.
Now is not the time to sit and wait out the downturn. Now is the time to take advantage of the opportunities that arise in such an economic climate and to slim down your business to its optimum levels, review financing structures and costs, re-evaluate your supply chain and make effective and efficient changes where necessary.
Those companies that act now to reduce their exposures and costs, take advantage of opportunities and change their short-term game plans or strategies to fit in with the current environment are the companies that will survive and prosper over the undoubtedly difficult next few months.