When a company recovers from financial distress

It is said that even the most successful businesses have failed at some point in time. Companies that are financially stable today may not be so tomorrow. Equally, many companies that are financially unstable today may have a turnaround strategy that propels them to success.

Handled correctly, rock bottom could serve as the first stepping stone a company needs to begin climbing back up to the top. This is the lesson learnt from the recent restructuring of the Nairobi Business Ventures Limited (NBV) through the injection of capital in exchange for equity by a strategic investor, Delta International FZE.

Listed by introduction on the Growth and Enterprise Market Segment of the Nairobi Securities Exchange (NSE) in 2016, NBV experienced significant financial distress that saw the company that had over 20 outlets in prime locations in Nairobi face liquidation from landlords and eventually close all its physical outlets.

The company resorted to e-commerce, which also failed. The audited financial statements of the company for the year ended March 31, 2019 indicated a drop in sales to a meagre Sh13.2 million and a worsening negative equity due to loss of stock and fixed assets.

In November 2020, NBV was suspended from trading on the NSE to allow the conclusion of the restructuring process. At that time, its shares were trading at a low of Sh0.71 each, with a market capitalisation of Sh27.6 million and 38,600,000 shares in issue.

At the close of year 2020 when the restructuring exercise was concluded, NBV share price had shot by more than 490 percent, largely due to the restructuring that included a share and price split, allotment and issuance of new shares to Delta International FZE. Today, the company’s share is trading at aroundSh4.87 each, with a market capitalisation of Sh2.4 billion and 492,200,000 shares in issue.

The last two years culminating into the conclusion of the transaction saw a myriad of activities, discussions and negotiations between NBV, capital markets regulators, transaction advisors, creditors and shareholders.

From the NBV story, the following lessons emerge:

Market solutions for distressed companies exist

There are investors who specialise in acquiring companies in financial distress especially where due diligence gives them confidence in the structures and viability of the company. The business of these investors is to buy a significant part of the existing debt, effectively reducing the number of creditors and facilitating a consensual solutions that may include negotiating for settlements, stand-stills and debt restructurings with creditors. In the case of NBV, the investor also got access to the capital market by acquiring a significant stake in the listed company and keeping NBV listed on the NSE.

Company in distress must develop and execute a turnaround plan 

The company in distress must create and own a realistic turnaround plan. Working with all stakeholders, the company must obtain buy-in of the plan and commit to implement it to conclusion.

Skilled and innovative transaction advisors are key to success of the turnaround plan 

In the past, distressed companies that were technically insolvent mostly followed the route to insolvency, leading to liquidation. Today, innovative turnaround transaction advisers have shown a preference for addressing troubled situations through a transaction that best suits the circumstances of the company without necessarily liquidating it.

The process of soliciting interest from various potential strategic investors, coordinating their information requests and eventually settling on a buyer or lender is complicated. Transaction advisors such as investment bankers and skilled lawyers with necessary expertise are essential role players in a distressed transaction.

Whether seeking to negotiate a settlement agreement, standstill or debt restructuring agreements with creditors necessary for rescue financing; or structuring a sale that may either involve an outright sale of a significant stake or subscription of shares by a strategic investor or simply a conversion of existing debt into shares, the legal needs of a distressed company are substantial. In this regard, the benefit of working with skilled and innovative professionals cannot be overemphasised.

Open and regular communication

The company and transaction advisors must proactively make regular calls and updates to all key stakeholders. The communication must be transparent and factual. With reliable information given to investors, creditors, shareholders and regulators, the company is in a better position to negotiate with each stakeholder as may be needed to make the turnaround a success.

NBV demonstrated that there is no shame if a well-run business suffers cash flow issues and stares at default. The key is to have honest communication with necessary stakeholders and come up with innovative ways to turn the situation around.

Need for a responsive and facilitative regulator

As a measure to protect investors, the Capital Markets Authority (CMA) and the NSE have in place mechanisms to predict financial distress and determine a listed company’s financial health. There is need for the regulators to not only detect early signs of distress but to focus on the possible remedies before a crisis is reached.

In the case of NBV, the CMA and the NSE worked together with the company and facilitated the successful completion of the restructuring plan.

Notably, the work of the regulators to facilitate the turnaround is made easier by the commitment and cooperation of the management and shareholders of the distressed company as well as the transparency and reliability of the information given to them.

The story of NBV is a big lesson not only for listed companies but all businesses that have faced financial distress especially due to supervening factors such as Covid-19. The ability to adapt and be innovative is paramount.

Ms Wangui is Chief Officer, Regulatory Affairs at the Nairobi Securities Exchange.