TFG | Addressing the fundamental lack of available risk capital that can be applied quickly in a financially distressed business

Satisfying the Turnaround Financiers Requirements

To obtain adequate turnaround finance, it is important to structure the deals to ensure that the turnaround financier’s requirements are satisfied.
Clearly, there are no rules that can be set out but the table below attempts to summarise the principal issues that will count for each type of financier.

There are clear differences between all possible funding sources, but it is clear equity providers are the most demanding. To illustrate this:

* Equity providers will normally provide their “equity” as a combination of debt and equity. The debt portion will (normally) be subrogated in repayment and security to the primary debt lender.
However, the equity provider will still consider the possible security in assessing the risk/return issues.

* The equity provider will therefore want to earn interest on the debt.

* The equity provider will want the debt to be repaid.

* The equity provider will search for a cheap equity entry point as well as a realistic and attainable exit.
* Therefore, there are lots of additional hurdles to jump through to satisfy equity providers. But the most fundamental issue is to communicate and satisfy all types of providers that: The business is viable and that the turnaround can be demonstrated in substance. This is commonly done by using a “bridge statement” (see appendix 1).
* The required management changes will be implemented. This is a huge area that can not be covered by this article. It is essential to emphasise that financiers require these changes to be addressed and implemented concurrently to providing more cash. The difficulty is communicating this to them within the time frame required.