The management team had been retained and a new non executive chairman was appointed by the investor who “had done a good job” in another investee business outside the sector.

Eighteen months later the business had burned its online development budget, had made no impact in terms of market share and shareholder value had been decimated, admittedly in the face of the severity of the recession impacting in a niche segment of the retail sector involved in products which were luxury and/or “not must have” items. And the bank covenants were about to breach on a number of fronts.

One would have expected most experienced retailers to have seen this coming, more or less, and made a good stab at making whatever operational changes were necessary. In this case, in retrospect, having achieved the buy-out and the capital injection required to achieve their business dream, the management seems to have gone to sleep and waited for the market to come to them. Retail never works like that. Customers voted with their feet.

First of all, their patience exhausted and, in common with some other investments they had made in 2006-2007 with hefty debt multiples, the investor decided that the root cause of decline was that their choice of chairman was responsible for not focusing the team hard on the agreed buy-out strategy and in particular the phasing of the new online service. In short, he simply had not managed the board properly, relying on management and technical reports as received without the requisite analysis and scrutiny…without asking the difficult questions.

So the appointment of a new Chairman was seen as the catalyst for significant change and for the restoration of value over an extended investment timetable. James Wheeler of PILOTpartners was engaged to source a shortlist of three sector specific, interim turnaround chairmen – first to advise the investor on the art of the possible, how to handle the bank and then to look at the options for a realistic recovery. The interviews were held and the preferred interim chairman started work straight away.

Within three days the extent of the management team’s failure had become all too clear. The chairman reported:

• The technology platform for the online project was clearly flawed but could be resolved quickly. The project had been outsourced and no director was prepared to stand up and be counted for its failure.
• The CEO had been in the business for many years, was seen as an industry guru whose word was gospel and was therefore rarely challenged. Questions were now being asked.
• The finance director appointed at the LBO was technically gifted but had little experience of cash & currency management and his forecasts were always going to be some distance from reality. He needed to be replaced. The controller was competent.
• Merchandising was universally from the Far East. The buying team had been paying over the odds for years, there was no currency hedging policy (see CEO & FD above). The relevant director (with a fancy job title) responsible was bright enough but needed turning round.
• Margins arising from the online business should have been much higher than its high street equivalent; the reverse was the case. The sales director needed to go.
• There had been no investment in the warehouse to cope with customers converting to online purchasing.
• Staff morale was becoming a real issue, their working environment almost 19th century.

That was in June 2009. The chairman’s recovery plan was quickly agreed with the investor:

• The bank agreed to covenant relaxation – at a price.
• The chairman hired PILOTpartners to replace the finance director and sales director in week 3 with proven retail sector expertise. These appointments are working out very well.
• An interim buying specialist and a supply chain/operations manager were hired to support the merchandising director with the fancy title.
• The CEO was given some time to redeem himself and to take responsibility for the implementation of the recovery plan changes under the chairman’s eagle eye. Sad to report that this hasn’t worked out well and he is now being replaced by one of the sector’s best known interim executives until a permanent post holder can be hired some time after the Christmas/New Year period on which the business relies for some 45% of annual sales.
• An interim warehouse manager has just started to take responsibility for getting goods out to customers in time for Christmas…
• The business is back on track.

What key issues are the ICAEW addressing to the private equity industry in the current lending gap?
Banks need to be more consistent and transparent in their relationships with small and medium sized businesses (SMEs). We even conducted some research which showed major inconsistencies between different banks and even within branches of the same banks. Different lending practices and marked variations between lending decisions were reported between ‘relationship’ managers and head offices within banks. This has led to confusion for small businesses with many avoiding contact with their bank and easily becoming apprehensive when submitting an application for funds. That is why we at the Corporate Finance Faculty at the Institute have been putting on restructuring and turnaround road shows around the country. So far they have taken place in London, Bristol and Birmingham and one is planned for Manchester in September.

Do you believe private equity backed businesses are any safer than others when it comes to keeping to banking covenants?
An impossible question to answer! PE firms monitor portfolio companies’ performance very closely through both direct involvement through board seats and close monitoring of KPI’s and the analysis of financial results and projections. As a result, they are subject to a high standard of governance, oversight and scrutiny. Ultimately for any company whether PE backed or not, covenant compliance is achieved by performing to plan.

Many private equity managers are the best of the best, but may not have the hands-on experience to turn a business around. What are some simple steps they can take to assess where an investment is going wrong?
Seeing where an investment is going wrong and having the hands on experience to turn a business round are two very different skills. A PE manager is paid to identify early on where things are going awry and implement the actions necessary to address the problem. This may include engaging hands on turnaround management skills. It is highly unlikely that a PE manager himself will consider that he has the hands on experience to turn a business round.

Are you finding that many private equity managers are waiting the recession out rather than getting outside help when it comes to debt restructuring and turnarounds? Has this had an adverse impact on portfolio companies’ fight for survival?
PE firms have built up their own support structure of trusted advisers. These include industry specialists, NXDs and Chairmen. More and more they are using these agencies to deliver the changes necessary in their portfolio companies. This is particularly true of the mid-market firms. As a result the need for “outside” help in the truest sense may be less.

Recessions are usually busy times for restructurings and turnarounds, but is this the case in this recession when it comes to the private equity community?
The biggest impediment to restructurings is currently the capacity within the banks. They do not seem to have the level of resources to address the issues, particularly in the mid- market.

What steps can private equity firms take to improve their image to the Treasury Select Committee and the greater public even when their portfolio companies are suffering and they need to make tough decisions?
Start to provide expansion capital to replace the debt that is no longer available from the banks and to recapitalise private companies’ balance sheets.

My client was a private equity-owned UK business that provides non-prime consumers with hire purchase (HP) finance, to fund the purchase of used vehicles. With an average loan origination size of £6,000 and term of four years, it has a platform to service in excess of 50,000 loans. It’s a sophisticated business that uses wholesale bank funding to finance its receivables, with advanced underwriting, collections and treasury capabilities. Funders rate the company highly and it was able to continue raising significant amounts of new funding even after the credit crisis had broken in 2007.

The facilities make use of off balance sheet structures, in terms of which Special Purpose Vehicles, or SPVs, purchase the receivables post-origination, using senior bank debt at an agreed advance rate.

Repayments from customers belong to the SPVs and the company, which as subordinated lender, is entitled to the ‘spread’ that remains in each SPV after paying down senior debt and funding costs. The company uses the spread to repurchase delinquent loans from the SPV.

These arrangements work very well when the originator is in growth mode and funders have appetites for more lending. But when this changes, there is no quick or easy exit for senior lenders, because the SPVs’ assets are future cash inflows far into the future, which cannot be accelerated unless customers default. Even in the event of an SPV defaulting, the senior lenders’ alternatives are very limited.

Fortunately for the company, its experienced CEO had had the foresight to seek a battle-hardened restructuring interim several months before the credit crisis struck. I went in as finance director and had the rare luxury of time to tighten cash controls and introduce robust, bottom-up forecasting before the crisis struck.

When, in September 2008, the credit crisis overtook the company’s main funders, I took on the CRO role as well and led a project to restructure the three bilateral bank facilities. These ranged in size from £125m to £145m and were supported by a significant warehouse line from the private equity parent.

It was vital to appoint advisers with recent and relevant experience in this specialised field, who would have credibility with the banks. Through my relationships in the restructuring community, I was able to quickly set up a credible beauty parade, which resulted in the engagement of restructuring and legal advisers.

The restructuring was one of the most complex that any of us had ever undertaken, not least because lender distress was new territory for all parties involved. With cash already stable and tightly controlled, the first challenge was to understand the detailed rights and obligations of the parties. While the company and its lenders had been in growth mode, the focus had been elsewhere. The legal advisers quickly filled in the gaps, in the process refreshing the corporate memory of provisions in the documentation that proved to be critical for the company’s survival.

The second was to model the expected performance of the individual portfolios, six years into the future. The advisers were exploring new and difficult territory, because small movements in factors, such as early settlement and loss rates, can cause significant variations in outcomes.

There were unusual structural elements to contend with as well: no bank was a creditor of the operating companies; the parent held the security over the operating companies’ assets; and each bank lent to a different borrower. To complicate matters, the forecast outcomes for individual banks were dependent on the pool of loans their facilities funded and as such were significantly different.

It was agreed at an early stage that the banks would work together to agree a common position and that they would make use of the company’s data, rather than each appoint their own restructuring advisers.

Both the solution and the negotiations were fascinating. The strong symbiosis between the company and the funders meant that counter-intuitive solutions offered the best means of minimising value destruction, one example being the lenders continuing to support new originations as the best means of achieving a soft landing in terms of future losses on the portfolios.

Suffice to say, the company continues to be supported by all of its funders and is now well placed to take advantage of the current market conditions. It is one of the few players still originating in the non-prime automotive sector, with some significant competitors having disappeared.

This brings me to the topic of acquisition opportunities. Bank funding for new originators in this space does not presently exist. Existing funders are in a difficult place because, aside from the liquidity and capital allocation consequences of staying involved, they have to support the existing originator and servicer.

Auto loans have a relatively short life. The spread they generate runs out quite quickly after a certain point in their life. To maintain the benefit of credit enhancement,it is in the existing funders’ interests to recycle capitalfor origination. In other words, suddenly jumping off the carousel they’re on could cause significant losses. Their only option is to slow it down gradually, for a soft landing in a couple of years.

Having decided to lend only the minimum, at some future point they all will face the decision of selling the sub-economic rump of the portfolio. Then there is the issue of a servicer focussed on cash collection not being motivated to keep accounts up to date, only to collect something.

On the other hand, the subordinated lenders to these bank funded portfolios are enjoying massive margins, with high fixed income and low variable funding costs.

There exists a significant opportunity for a portfolio buyer to generate high returns within a relatively short time frame, through discounted purchases from trapped bank lenders and consolidation in order to achieve scale. At the same time, maintaining a motivated servicing platform and keeping the portfolios refreshed to some degree, by refinancing existing customers at good rates of return.

Looking back on the assignment, a positive outcome was by no means the likely answer and getting decisions right on a number of apparently small issues helped the company to avoid the fate of its competitors: the experienced CEO selecting an interim who could step up to the CRO role and sticking rigidly to relevant and recent experience when selecting advisers being two of them. It was important for everyone on our team to remain unflappable in the face of tremendous pressure from the lenders, who were facing serious issues of their own through the process.

Alan can be contacted at alan@gullan.com

Step One: Create an efficient collections process

• Measure the efficiency of the collections process by the percentage of the ledger which is outside terms and overdue. Your primary focus should be on the accounts that have an overdue element. Prioritise by using the 80/20 rule to segment the ledger and focus collectors’ time upon the higher value overdue accounts thereby achieving the greatest improvement quickly.

Step Two: Improve Targets

• The next step is to allocate accounts to collectors to establish individual accountability for the improvement targets. Focus collectors on collecting and, where possible, reallocate other activities. Another important task is to calculate ‘days sales outstanding’ (DSO) and set reduction targets significantly to reduce the overdue percentage in the ledger.

Step Three: Peer pressure with a purpose

• It doesn’t hurt to put in an element of peer pressure by using flip charts visibly to record the daily progress of future and current monthly DSO targets and the associated monthly cash collection targets. All of these should be predetermined and on view for each member of the collections team.
• Make sure the collections area is buzzing with phone conversations to major accounts and not a reactive pool of letter writers. Collections staff should look at collections pro-actively rather than a reactive ‘dunning letter’ process. Call major accounts before the due date to get cash pledges and provide time to resolve disputes. It may be wise to even outsource the collection of accounts below a certain debt level.
• Plus, contact with customers on a regular basis will enable a better understanding of the causes of overdue accounts. Maintaining a customer call log, which records the reasons for non-payment and the means of settling disputes, will also be helpful.

Step Four: Dispute feedback

• From the call logs, your team can develop a dispute feedback loop. This enables collections to discuss what is being said at weekly meetings and to highlight systemic operational issues that need to be fixed and administrative errors, which give rise to non-payment, and the issue of credit notes. This should assist clean deliveries and invoicing and will improve competitiveness by increasing the OTIF (on-time and in-full).

Other tips:

• To increase cash receivables make an active effort to seek direct payment transfers and consider early settlement discounts.
• Throughout the year and especially now, customer credit periods should be reviewed so that a company can ascertain whether there are reduction opportunities. Does the credit period commence with the day the invoice is raised or the end of the month in which it is raised? Just make sure you avoid the latter scenario.

Joe Considine of Considine Associates can be contacted on 07710 397569 or jpc@callp.co.uk.

Considine Associates was founded by Joe Considine after 20 years as a partner at PricewaterhouseCoopers whose turnaround methodology he invented. His firm brings together a multi-disciplined team with a wealth of turnaround know-how and experience. Considine Associates works with stakeholders and management, providing leadership, advice and executive support, as appropriate, to realise the potential of underperforming and troubled businesses.
Visit www.callp.co.uk for more information.

Great expectations: vital characteristics of a successful turnaround executive
Turnaround directors have specialist expertise in corporate rescue and can quickly be introduced into a troubled business. They will take on an executive role in a turnaround and/or work in an advisory/mentor capacity alongside, or independent of, a professional services firm advising management and key stakeholders.

Mark Taylor says that in his experience more times than not incumbent management teams lack the experience in turning around a business. That is why it is wise that the turnaround director takes an executive role, such as chairman, non-executive director, CEO, or chief restructuring officer, working in tandem with existing and second tier management or directly augmenting it, if required.

He describes turnaround directors as independent operators who will have a combination of both sector and situational experience, with the key differentiator being “proven and credentialed situational capability”.

“The common theme is that we have ‘done it before’, bringing our skill set rapidly and effectively to a stressed situation,” says Taylor. “Tough choices have to be taken – and if management leaves those choices too late they lose control of their own destiny. The three dimensional paradigm that needs to be identified and agreed upon is fix it and grow it, close it, or exit it; this could be a product line, customer relationship or a total business entity.”

Selection process
When selecting an appropriate turnaround director, he says there is often a conduit to this introduction, such as firms like PILOTpartners, who may already be acting in the role of trusted advisor. Having a track record to look back on will give firms a good idea of what a director ‘can do’, but almost as important is the style that they bring to complement existing management to ensure value is driven from day one of their introduction.

While turnaround directors have a duty of care to the company, which usually engages them, they are focused on maintaining strong relationships with all key stakeholders; very often it is these key financial stakeholders, who recognising there is a burning platform, have introduced them to management in the first place. Taylor says their ongoing support is pivotal to ensure a turnaround strategy is adopted and successfully implemented.

Increasingly, in today’s market, turnaround directors also have a role to play in improving a business’s longer term resilience, proactively to ensure it does not move into a distressed space in the medium term.

Pollard Case Study
Mark Taylor was introduced to Pollard, a Midlands based automotive supply and services company, by PricewaterhouseCoopers to determine if there was an alternative strategy to avoid the threat of administration.

While the assignment included a new sector for Taylor, it was business as usual as he was being brought in not for his sector expertise, but rather his situational capability.

“My first course of action was to determine the cash and stakeholder position,” says Taylor.”Drastic changes had to be implemented to streamline the business. I devised a 90 day plan and proceeded with execution.”

What the company required was additional cash management support and initiating a forecasting capability around the existing functional financial role–identifying what was adding value and what was not.

To maximise cash and profit generation some major decisions had to be made, the toughest of which for the management, according to Taylor, was to exit manufacturing and to allow him in as CRO, in the first instance, and commit to a non-family leader quickly.

“I had to explain in clear terms the implications of the burning platform and what was required in terms of a way forward and supporting them alongside the plan that I devised with the most able internal person who was not a family member–the technical director,”

Taylor says that after he had identified the right person, they worked closely on the detail. The technical director was soon able to develop his skills outside his normal role and raise his own profile within the company. This gave Taylor the confidence, post-transaction, to hand over the batten to him to become managing director. “He then followed on the plan we devised to drive the plan forward to sustained profitability,” Taylor explains.

“Often my job in any assignment entails getting the management team out of their comfort zone, both in the initial stages and as a constructive challenge along the journey. Remembering that the people need to be on the train with full management commitment; rather than being left at the station – even if you have to drop a few off on the way,” says Taylor.

Once Taylor took on his role as CRO, he restructured internally the roles of the family directors and repositioned their roles externally to manage external stakeholders, such as customers and key suppliers. One of the key objectives was also to manage and reconcile a strategic Japanese supplier/partner sensitively, yet with commercial imperatives.

“We also tuned our significant bank exposure risk to a fully recovered position and ultimately achieved a good ongoing client relationship between stakeholders post-transaction,” Taylor explains.

To ensure a smooth transition for all the changes the company introduced legal advice and correctly consulted and briefed staff. Real-time communication was kept on a daily basis with all stakeholders.

When it was time for Taylor to move onto his next project he identified a new managing director for the company. But the major changes did not stop there.

“The company decided to concentrate on its most profitable part of the business, sales and distribution, which meant moving away from manufacturing, which was unprofitable and cash draining. We revisited what was core and a devised a competitive proposition going forward, while engaging key stakeholder support.”

The management decided that the best course of action for the next stage of the company’s development was to sell shares to its Japanese partner, Mori Seiki. “It was the best solution for all stakeholders. The equity sale represented a win-win position for all key stakeholders,” says Taylor.

Mark Taylor Managing Partner Blue Sky Associates LLP
Mark can take appointments as a decision-making executive to support management, including chief restructuring officer (CRO), CEO and chairman. He is a member of all the principal UK professional services turnaround panels and has worked with client companies and key multi-stakeholders both in the UK and internationally.

T: + 44(0)7786 368715

E: mark@bluesky-associates.co.uk

South East England

Successful product development leads business recovery

This is an interesting one – a long held, private equity minority stake in a business which “had lost its way”, where the bank was prepared to accept covenant changes for a slice of the action and enough new cash to enable the transformation of the business’s production capability which would support a new line of products in very tight market conditions.

The business had been loss making for 2 years and very little value remained in the business. A turnaround director had been in there for several months on a part time basis gradually improving the cash position by improved stock and working capital and, critically, persuading the directors (a bit long in the tooth) to close down an iconic product line which was the main cause of the gradual cash drain in the first place. The lack of clear thinking had led to shilly-shallying of the worst type until the turnaround director knocked heads together. Then the issue for the bank became simply “how quickly can we get this completed?”

James Wheeler of PILOTpartners was appointed by the bank to secure the services of an interim manager to head the project team to complete in three months, subject to some stringent project execution conditions. The rapid turnaround solution suggested by PILOTpartners included:

 Appointment of an interim production director to take full ownership of the new facility rather than leaving it in the discredited hands of the MD who had hitherto fulfilled that role.

 Workstreams put in place involving secondary management and two key external contractors:
- Reconfigure the lay-out of the factory
- Establish a new purchasing function (secondary interim manager secured)
- Establish lean manufacturing processes from scratch
- Agree new working practices with the unions (plural)
- Introduce a new inventory control system
- …and finally to establish a clear line of communication with the finance director who was transformed from non-committal at best to the key driving force for change overnight

The project was completed on time and within budget. The interim manager had been incentivised by way of a bonus based on timetable and value achieved which was shared by PILOTpartners who had agreed to waive part of its fees in order to participate in the upside.

Please email j.wheeler@pilotpartners.eu if you would like tickets.

All concerts start at 7.30 pm at St John’s Smith Square, London SW1 unless otherwise stated

Monday, 23rd November 2009
Programme to include:
John McCabe – Labyrinth Symphony
Janacek – Taras Bulba
Shostakovich – Symphony no 5

Wednesday, 20th January 2010 (at Cadogan Hall, Sloane Terrace, London SW1)
Dohnanyi – Symphonic Minutes
Tchaikovsky – Violin Concerto (Soloist – Jack Liebeck)
Stravinsky – Symphony in C

Saturday, 20th March 2010
With guest conductor Andrew Gourlay
Programme to include:
Britten – Sinfonia da Requiem
Holst – The Planets

Monday, 10th May 2010
Bruckner – Symphony no 9

Monday 21st June 2010
Wagner – Forest Murmurs
Sibelius – Tapiola
Arnold – Larch Trees
Nielsen – Symphony no 4