Self-Rescue or A White Knight?

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As businesses affected by the pandemic have yet to be recover, many are expected to restructure their debts after the moratorium. While some businesses embark on a financial restructuring route, others may need to recapitalise their businesses with a ‘white knight’ and still others may focus on new business models or operational turnarounds.

 

A ‘white knight’ is a company or individual that acquires a target company. It is usually a takeover, which is why some may prefer to retain control via ‘self-rescue’. “A white knight is necessary when the business is operating in a weak sector that requires new funds to recapitalise its business. In some cases, white knights bring in new competencies and skills to complement existing management” says EY Solutions LLP strategy and operations partner Sriram Changali.

 

However, the downside is that the existing shareholders and creditors tend to take higher haircuts and experience lower returns. That may ensure the white knight’s investment is commercially viable. 

Banks could be able to support self-rescues, where the business essentially could demonstrate that it is still viable. But self-rescues present challenges when it comes to whether management has the resources and skills to execute the turnaround and ensure a successful restructuring.

Regardless of whether local businesses will take the white knight or self-rescue route, financial restructuring is dependent on the financial forecast of a business. It is also driven by the design of the recourse or the mechanics to manage forecast risks and defaults. This, in turn, determines the level of debt that the business can afford.

On that note, Sriram believes that the key to developing sound financial restructuring is to have robustly designed scenario planning and determine appropriate mechanics, triggers and resources that can mitigate the risk of a post-restructuring default.

“Financials restructuring is not only dependent on a business’ financial projections. It is also driven by the design of the recourse or the mechanics to manage forecast risks and defaults. A well-designed mechanism should be able to close any gaps in the forecast by automatically converting the shortfalls to ordinary shares or equity-related instruments to effectively negate any future risk of default,” he said. 

At MP Capital we will work with you on financial restructuring or rescheduling. With over 25 years’ experience in the business, we can tailor to the needs of all stakeholders.

Reference:

Malaysian firms may be in need of a ‘white knight’ post-Covid-19, Focus Malaysia, 25 Sep 2020