How can restructuring help companies in distress?

The impact of the COVID-19 Pandemic is enormous on the economic ecosystem and has resulted in unprecedented shocks that have significantly impacted how businesses operate. The lockdown and social distancing measures to overcome the Covid-19 spread have led to a drop in demand and supply. Supply chains have been enormously disrupted by the Pandemic and continue to struggle even as businesses start to reopen.

The crisis has made a clear distinction between companies with a strong and effective business model ready to combat the Covid-19 situation and unprepared companies. The Pandemic has varying impacts on businesses; for some, it has made a permanent impact. For others, it was a temporary phenomenon, and business as usual continued and is expected to operate in the same manner in the future.

Depending on the industry in which the business operates and the company structure, the shocks from Covid-19 may be temporary. The demand is already returning in some sectors. In many cases, however, businesses are struggling with continuing disruption. This phenomenon will prevail for some period, and ease will come after the vaccine’s availability for COVID-19. Many industries will see a return to a “new normal” and will not need to change their existing business model.

Other sectors are experiencing a dissimilar impact. The impact of COVID-19 has been disruptive and may result in a permanent change due to customer behaviour changes, fear, regulation, or a shift in values. Therefore, their previously healthy business models will need to adapt; for example, airlines are experiencing a drop in demand of more than 90% and long-lasting fear effects. The current travel restrictions have impacted personal travel, the latest work-from-home culture, and the economic downturn has caused businesses to reconsider travel and permanently reduce overall demand for air travel.

Regardless of the robustness or relevance of business models before COVID-19, the crisis’s immediate impact has created financial stress for affected companies. Short-term liquidity problems are apparent in almost all sectors, with operational cash requirements often remaining very high while turnover drastically reduces. Short-term financing instruments are widely deployed to help companies survive the crisis.

So how restructuring will help these companies to overcome the distress situation:

  1. For some companies, financial restructuring measures will be sufficient to enable these companies to return to profitability
  2. Operational restructuring measures will be necessary to turn around business models, especially in the retail and automotive sectors. The higher-distress industries will require more formal restructuring procedures.
  3. Companies will require more formal restructuring procedures in some extreme cases, including the insolvency court’s involvement.

In short, the crises have shown the businesses that nothing is unexpected; even the apparent tough and big enterprises have suffered in these crises. Companies must make provisions for such contingencies in their business plans and keep them robust to accommodate the changing business environment.

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