Corporate life often mirrors personal experiences. The COVID-19 pandemic shook the foundations of our lives, prompting a series of unexpected consequences across both our personal and professional domains. At the onset of the pandemic, most people did not anticipate such a significant disruption that would last well over a year. Some have gained the “freshman 15 pounds” during quarantine due to limited mobility, lack of exercise, and extended periods in front of computer screens on zoom calls in sweatpants all day. And there are those who took the opportunity to refocus, establish discipline in their routine, and get in the prime shape of their life. This analogy can be applied to the corporate world as well. Leaning up your organization will remain critically important in this uncertain future.
G2 Capital Advisors is pleased to present its Transportation & Logistics industry updates for Q1 2021, providing commentary and analysis on M&A and market trends within the sectors. We hope these reports find you and your families safe and healthy, and encourage you to contact us directly if you would like to discuss our perspective on the current market environment, trends, or our relevant industry experience.
G2 Capital Advisors is pleased to present its Industrials & Manufacturing industry updates for Q1 2021, providing commentary and analysis on M&A and market trends within the sectors. We hope these reports find you and your families safe and healthy, and encourage you to contact us directly if you would like to discuss our perspective on the current market environment, trends, or our relevant industry experience.
G2 Capital Advisors is pleased to present its Technology & Business Services industry updates for Q1 2021, providing commentary and analysis on M&A and market trends within the sectors. We hope these reports find you and your families safe and healthy, and encourage you to contact us directly if you would like to discuss our perspective on the current market environment, trends, or our relevant industry experience.
G2’s unique team of seasoned C-level executives, restructuring advisors and investment bankers provide our clients with a clear path to long term operational stability, a sustainable capital structure, and the financial flexibility necessary to achieve their strategic goals. G2 generates substantial value for stakeholders through our operational and transactional capabilities and focus on risk mitigation.
It’s now over a year since the start of the pandemic, and, despite a stepped-up vaccination program, and a loosening of business restrictions, a robust recovery is still a ways off. Although COVID-impacted earnings are recovering for many businesses, uncertainty remains as to what the new normal will look like, and when it will be reached.
After a slow M&A market in the spring and summer of 2020, activity has picked up through early 2021. Many have delayed M&A in the hopes of maximizing the value of the businesses they’ve built. Nevertheless, there are ways for sellers to achieve their goals, even in the midst of uncertainty.
“This recession will finally end the private-sector ‘debt super-cycle,’ says firm that invented the term” – MarketWatch, April 4th, 2020
Over the past decade, forecasters have been anxiously tracking rising corporate leverage levels and the proliferation of covenant-light loans, while lamenting the woefully declining credit quality of borrowers. Lenders could only “amend and pretend” for so long, they argued, and it would be just a matter of time before we witnessed an apocalyptic deleveraging event that would finally mark the end the current debt cycle. The sovereign debt crisis, tariff war, inverted yield curve, all came and went, but a global pandemic should have been the final straw. As infections and lockdowns spread in early 2020, commentators competed to see who could predict the biggest surge of bankruptcies and corporate defaults.
By Q3 defaults had fallen to below pre-COVID levels, and yields had declined dramatically across the board. In a shocking turn of events, debt issuance had surged to record levels, providing liquidity to healthy and distressed borrowers alike. The ultimate irony was, as S&P Global noted, investors “were so supportive that some of the corporate sectors that saw the largest increases in bond issuance relative to the prior five years were those most negatively affected by economic lockdowns.” Undeterred, commentators have now rolled forward their doomsday forecasts, bracing for an even bigger deleveraging and fallout in 2021. But what if we have collectively “broken” the corporate debt cycle? Consider the following three factors:
First, and foremost, is the Fed backstop, which involved unprecedented direct lending to both investment grade and distressed borrowers. Overnight, the Fed’s balance sheet nearly doubled to $7.4 trillion, all but ensuring that the Fed will be a permanent participant in private credit markets. Markets are inarguably in “risk on” mode, and it’s difficult to imagine any kind of crisis of confidence in the foreseeable future.
Second is the near-mythical “search for yield” and its side-effects, specifically the prolific rise of non-bank lending. Institutional investors, grappling with falling returns on fixed income and other assets, have pushed deeper into the private credit market. AUM at private debt funds has skyrocketed from under $200B in 2007 to nearly $900B, with $300B of dry powder waiting to be deployed. The new breed of lenders is more creative and better-equipped than traditional banks at segmenting and capturing risk premium at all levels of the capital structure. These investors, willing to take greater risks, were happy to put money to work during the pandemic, while banks battened down the hatches and sat on the sidelines. For these lenders, COVID has become a mere EBITDA adjustment, and most were willing to ride out the storm and “amend and extend” into 2021 leaving the search for yield poised to continue unabated into the future.
Last, but not least, is the evolution of lenders’ strategic options for dealing with distressed loans. Historically, a bank loan workout was a lengthy affair, with a forbearance or amendment followed by a two or three-year operational turnaround of the borrower. Today’s lenders prefer to move quickly to exercise their remedies. They are frequently turning to secondary debt sales, special-situation refinancings, carveouts or expedited sales of the company. Increased specialization means that there are buyers for every type of security, asset, and distressed business or division. For deeply troubled credits, options such as Article 9 foreclosures or Section 363 sales can be used as a tool to efficiently foreclose and sell viable assets at premium prices, and then wind down the remaining liabilities through either an in- or out-of-court process. As a top-tier middle market restructuring advisor, we employ these strategies (and more) every day on behalf of our clients, and have witnessed firsthand how lenders can now dynamically shift risks throughout this ecosystem. More and more, lenders rely on our firm to provide not only financial and operational support, but also integrated banking capabilities and increasingly advanced legal sophistication.
In sum, we could be witnessing the end of the broad-based credit cycle, and the start of a new era characterized by more complex, localized pockets of risk accompanied by fewer, but larger, distressed events. The current debt-cycle may live on for some time yet.
Konstantin A. Danilov is a Vice President at G2 Capital Advisors, which provides M&A, capital markets and restructuring advisory services to the middle market.
When crises like the pandemic wreak havoc on businesses, having the right resources in key leadership roles determines whether a Company will successfully navigate a distressed turnaround situation or not. Rapid
and decisive crisis stabilization determines success. G2 Capital Advisors’ (“G2”) primary objective in a turnaround is to establish a capital and operating structure in line with the strategic priorities and cash generation of the enterprise. In partnership with key stakeholders, G2 extends the cash runway of the Company to create time for revitalization. This liquidity management exercise requires information to be developed and presented to a host of critical players, including but not limited to, shareholders, lenders/creditors, management, employees, customers, vendors, and any court appointed Trustees, if so needed.
Many turnarounds fail due to a lack of alignment between the Board of Directors and executive management on a strategy and timing to fix the Company. Bringing in a trusted third-party restructuring advisor, such as G2, to oversee the turnaround as an independent fiduciary can achieve such strategic alignment. Not all restructuring advisors are created equal and each situation prescribes particular skill sets and capabilities to effectively navigate the corporate turnaround. Of utmost importance, every restructuring and turnaround 1) must have a foundational plan, and 2) that plan must be published and communicated broadly. The entity or entities managing the turnaround must draw ideas out of the Company’s employees and stakeholders and galvanize them into action with an action strategy with specifics on what, when, and how. In the post-COVID environment, planning and communication have become even more critical as certain industries find themselves at a pivotal juncture. For many companies, massive strategic and operational shifts, and even fundamental changes to existing business models, will be necessary for a turnaround to be successful in this “new normal.”
Our successful turnarounds are accomplished by focusing on 4 C’s – Communication, Concentration, Cost Control, Cash Flow. Traditionally Financial and Operational focused restructuring firms stay on opposite sides of the fence. For middle market companies, hiring separate firms is cost prohibitive and inefficient. G2 is uniquely positioned to provide a one-stop shop with a fully integrated team comprised of operational, financial, and investment bankers to address stakeholder needs and maximize ultimate recoveries.
To address critical aspects of a turnaround, G2 proposes a two-pronged approach to focus on both Financial and Operational Restructuring elements. G2, as an integrated firm, can manage both aspects of financial and operational restructuring within one team. Usually, a transactional Chief Restructuring Officer (CRO) where there is a strong management team, or an operational Chief Transformation Officer (CTO) where the advisor steps in to run the Company day to day. G2 is differentiated in our ability to provide both functions to our clients with foundational industry experience:
Owning fiduciary responsibilities and represents an independent voice using the Company’s financial data to address concerns of all stakeholders.
- Reports to Board of Directors.
- Serves as liaison to lenders, creditors, etc.
- Manages all external communications.
- Leads negotiations with vendors or customers.
- Establishes go-forward operating cash flow budget.
- Generates required reporting.
- Manages any legal filings.
- Develops formal Restructuring Plan, driving to a successful Restructuring Transaction.
Working with existing management to determine appropriate operating parameters.
- Identifies useful assets and operations.
- Discontinues non-performing assets, divisions, products, etc.
- Prioritizes strategic initiatives.
- Identifies a few areas for concentration.
- Implements cost control measures.
- Minimizes Company cost structure.
- Manages internal communications with employees. Supports external communications.
- Sets go-forward performance targets.
- Augments interim management needs.
- Architect and executor of Revitalization Plan.
G2 believes any changes in organization culture will be driven by a vision, encourage feedback and require prompt action. The CRO in conjunction with a Company’s CEO and management teams must champion that change by cultivating it within the organization. By actively engaging all employees and helping them understand the new direction of the Company, G2 can achieves multiple objectives:
- Managing stakeholders
- Implementing rolling go-forward 13-week cash flow
- Developing strategic priorities (and if necessary, pivoting to succeed in the post-pandemic “new normal”)
- Stabilizing operations
- Identifying performance / process improvements
- Driving organizational change
- Identifying Company structural change
- Instituting risk mitigation parameters
- Identifying new financing needs
- Supporting clear communications
Frequent and continuous communication with all stakeholders and interested parties remains critical. G2builds confidence and trust within these groups through transparency and honesty. G2’s decisive and clear actions thereafter drive the successful turnaround process.
G2’s highly capable team, including seasoned interim CFOs, Controllers, or FP&A resources, not only can help our clients navigate challenging liquidity or performance environments, but also can drive improvement in core finance/accounting functions. Feel free to reach out to the G2 team to learn more about the approaches we are using across our 45 plus clients in our industries of focus.
G2 shares the stories of three influential Black figures who shaped the industries which our Firm serves.