Why Lenders Should REALLY be Concerned About Supply Chain Issues
There have been numerous articles and economic analyses written about the cause and effect of supply chain issues throughout 2021. It’s quite interesting however, to review how opinions have changed during the year.
At one point, many economists felt the supply chain issues were “transitionary” and would be resolved by year end 2021. Other economists were not as optimistic.
It’s now very clear that supply chain logistic issues will last longer than anticipated and may well last into 2022 or beyond.
PROBLEM WILL PERSIST UNTIL …
There are many reasons cited for the extent and length of this problem, however, it’s clear it will continue to be an issue until the economy starts to rebalance itself into more of a normal cycle and the current and prolonged spike in consumer demand levels adjusts back to a pre-COVID level.
This supply chain problem is having a significant impact on most businesses and in particular small to medium size businesses.
Additionally, businesses that are dependent on imported products or materials to produce finished goods are being more heavily impacted.
IMPORTED PRODUCTS vs. IMPORTED PARTS …
While some businesses are not directly importing products from overseas, they may be dependent on parts or materials from suppliers that are importing components from overseas sources.
Think for example, any product that includes a microchip. Orders for microchips now take around 22 weeks to fulfill, up from nine weeks pre-COVID, according to the Susquehanna Financial Group, and that delay has contributed, for example, towards out-of-stock gaming consoles, cameras and computers.
Supply chain problems should be of the utmost concern to banks and private lenders.
MAINTAIN REGULAR COMMUNICATION …
While many bankers have expressed concerns over these issues, particularly with their portfolio companies that are being impacted, the main gauge of the health of portfolio companies are based on monthly or quarterly financial statements provided after the fact.
Lenders may well find that revenue and profitability has suffered significantly and rapidly. Finding out about this after the fact may not provide sufficient time for lenders to react.
The key here is to maintain regular communications with portfolio companies and make sure to ask about how they are dealing with supply chain problems.
INCREASED INVENTORY LEVELS …
Not every company is impacted in the same way. For example, the cost of transportation has risen significantly, as well as the length of time it takes to transport and process shipping containers.
Moreover, many companies have had to change the way they operate just to survive. For example, a number of businesses have changed their inventory policy, from “just in time” to “just in case”, or ordering more inventory than is currently required, in case they have a delay in future shipments.
The cause and effect of this change has led to increased inventory levels and increased usage of working capital. Many companies are required to prepay for imported products or materials or open letters of credits to guarantee payments.
Given that it is taking longer for products to be produced, to be shipped and actually transported and processed, additional working capital is required to support the increased time required to finance the importation of products.
IMPACT ON WORKING CAPITAL …
Companies that sell products or materials to other businesses may see an increase in their outstanding accounts receivable as a result of supply chain related longer or delayed payment cycles.
This can also have a significant effect on a company’s available working capital.
Lenders must take a proactive approach to gain an understanding of just how supply chain problems impact their portfolio companies.
While many CEOs are dealing with the operational problems, they may not have the experience to assess the financial impact of their decisions.
While lenders always think of themselves as business partners with their clients, the need to be proactive under these circumstances is extremely important.
TAYLOR NEEDED SOLUTIONS …
The lender must assess how each of their portfolio companies are being impacted and propose ideas or viable solutions to help.
For example, a company that imports products that are supported by letters of credit, may need an increase in their letter of credit sublimit, or an increase in their overall credit line to accommodate longer transit times.
Companies that have increased their levels of inventory may need a temporary adjustment to their borrowing base advance rate, to help finance this spike in inventory.
Companies impacted by higher outstanding accounts receivable balances as a result of longer payment cycles may need some modification to their loan agreements to allow for an increase in the length of time in which payments must be made.
Otherwise, a company’s borrowing base may be negatively impacted by circumstances that are entirely out of their control if these outstanding accounts become ineligible to be included.
There are many ways lenders can be helpful.
A PROACTIVE APPROACH …
However, it requires a thorough and proactive approach to understand their clients’ unique requirements.
In doing so, the lender will not only be a hero in the eyes of their clients, but they will also take a big step towards mitigating future write-downs of loans related to poor performing clients.
All of us at Revitalization Partners wish all of our readers and their families a very
Happy Thanksgiving holiday.
Bonuses & Bankruptcy
Nothing makes media headlines faster than jaw-dropping executive incentive payouts and/or retention bonuses paid prior to a company’s bankruptcy filing.
Within this context, the impact of COVID-19 has been uneven across sectors and has contributed to poor performance across various industries.
Some sectors, like retail, were already challenged, J.C. Penney, Neiman Marcus, J. Crew and more teetered on the edge of solvency. With more than 18 months of the pandemic behind us, other casualties include airlines, hotels, car rentals, movie theaters, theme parks, and any other business, large and small, that brings people together in crowds. Many companies are in survival mode. Some will live. Some will die.
RESTORING SHAREHOLDER VALUE …
But prior to filing for bankruptcy, and as companies prepare to emerge from bankruptcy, there is an important consideration: the ultimate restoration of shareholder or stakeholder value.
The retention of key executives or bankruptcy savvy interim executives can be of critical importance during this extraordinary period. But the real question is, what types of bonuses make sense prior to a bankruptcy filing, and how should companies manage the optics with stakeholders?
A recent Reuters analysis of securities filings and court records identified 32 of 45 companies that paid out bonuses in the six-months prior to filing for bankruptcy, with nearly half making the payouts within two months of filing.
Several companies made large bonus payments, often while furloughing or laying off employees, before their bankruptcy filings.
For example,
- J.C. Penney Co., Inc. approved close to $10 million in payouts just before its May 15 filing while furloughing approximately 78,000 of its 85,000 employees
- Hertz Global Holdings, Inc. paid executives $1.5 million after having terminated over 14,000 employees before its May 22 filing
- Whiting Petroleum Corp. paid $14.6 million in extra compensation to executives before its April 1 filing
- Chesapeake Energy Corp. paid $25 million to executives and other employee in May, about two months before its filing.
IS IT APPROPRIATE?
Is the payout of a large bonus appropriate when so many people have lost their jobs, creditors go unpaid, and shareholders lose money?
Companies often pay bonuses before filing for bankruptcy due to the legal constraints on how executive compensation may be paid once the company is in bankruptcy (e.g., negotiations with creditors and the court, court approval, etc.)
The merits of bonuses often go beyond lining the pockets of executives and may instead be tied to short-term incentive bonuses for the prior year based on actual performance achieved, or long-term performance awards that happen to vest in the year of the downturn.
There may even be retention bonuses that encourage executives with the right skillsets to remain with the company, help get the company back on the road to survival, and ultimately realign executive and shareholder interests.
But regardless of the reasons, the optics of such payments in the face of the pain to employees and creditors can do significant damage to a company’s ability to successfully exit Chapter 11.
AVOID SINKING SHIPS …
Very few people want to be associated with a “sinking ship” and yet there is an entire industry that is dedicated to providing the best management to distressed companies.
And those “restructuring” executives have often seen and managed through a number of situations enabling them to minimize cost and time in the process while the company executives are just learning about insolvency and the bankruptcy process.
While keeping executives engaged during a bankruptcy can mean the difference between success and failure, these other options may be less costly to and more effective for the company and stakeholders than large bonus programs.
Boards do need a motivated, capable group to get the company back to solvency and profitability but rewarding the executives that led the company into the problem may not be the ideal solution.
BONUSES EMBRACED WHEN THEY …
Bankruptcy is not the only scenario where retention bonuses can have a role in overall compensation. Retention bonuses can also be effective in retaining and motivating talent during other periods of disruption.
Since a wide variety of stakeholders always scrutinize any type of executive retention bonus, the payouts are more likely to be embraced by investors and proxy advisors when they meet the following criteria:
- Pay out or vest after a defined period of time (e.g., two to three years)
- Consider awards within the context of normal pay for the recipient (e.g., up to 0.5x to 1x salary, delivered in cash and/or equity, or up to 0.5x annual equity)
- Include performance measure(s) and/or a minimal performance hurdle before payout or vesting
- Focus awards only on executives and employees whose departure would have a significant impact on the company’s performance.
HEADLINE GRABBING OPTICS …
Paying bonuses to executives prior to filing for bankruptcy is not new. What is new is the extraordinary focus by stakeholders on Environment, Social and Governance (ESG) issues.
This has now become a headline-grabbing, optics challenge that falls squarely on the “S” in ESG. While companies have blamed COVID-19 as a major contributor to their companies’ performance challenges, COVID-19 has really been the catalyst that continues to highlight the many social issues affecting the most vulnerable in our society.
And paying large executive bonuses from an insolvent company while conducting layoffs, exacerbates the company’s problems.
From health risks to pay inequality, the pandemic has provided a new lens for all stakeholders to opine on executive pay and to encourage a more holistic look at how all of a company’s stakeholders are being treated, including employees, suppliers, communities where the company does business, and shareholders.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
The “Great Resignation” is Killing Companies
In normal times, people quitting jobs in large numbers signals a healthy economy with plentiful jobs. But these are not normal times.
The pandemic led to the worst U.S. recession in history, and millions of people are still out of jobs.
Yet employers are now complaining about acute labor shortages.
Companies run through a basic set of plays during hot job markets.
These often include offering potential recruits more money; give bonuses, promotions, and extra days off to existing workers who get competing offers; and make some sort of commitment to career development for everyone.
4 MILLION QUITS NATIONWIDE …
But that hasn’t stopped the so-called Great Resignation of workers saying goodbye to their current job. In each of the last six months, there have been at least 4 million quits nationwide.
The nation had never had more than 2.4 million quits a month since the government started tracking the statistic in 2000.
Companies that are used to losing a few employees a year are seeing turnover rates of 20% or even higher. “It’s killing companies,” says Andrés Tapia, Korn Ferry’s global strategist for diversity, equity, and inclusion.
“The old strategies to attract and
retain workers aren’t working.”
GETTING HURT THE WORST ARE …
And yet, it’s small and mid-sized companies that are getting hurt the worst.
These companies have smaller staffs and, in many cases, have less ability to offer higher salaries and benefits. Yet, they must successfully compete for a shrinking base of qualified employees.
What can companies do to retain their current employee base? The answer lies with unconventional thinking.
Can a company offer employees equity if they are not currently doing so? Equity, properly done, can have the impact of employees thinking like owners.
Benefits like additional paid “crisis time” to assist with childcare or other emergencies, working with other employees to adjust schedules, allowing for maximum flexibility.
TREAT AS VALUABLE PARTS OF …
In short, treat employees as valuable parts of the company and make certain that your salaries and benefits are up to current industry standards.
The last item above is one that must be addressed across the company. In many companies, long term employees often leave because the salary requirements to hire from the outside have increased to the point where new hire compensation has increased to a par at or above that of longer term employees.
While large increases for employees may not be the norm, in the current market,
… an unfair, unbalanced compensation program is almost certain to create problems among your more experienced people.
GROWING & NEED TO HIRE?
If your company is growing and/or you have to hire from the outside, while skills and talent are important, there are other factors that will help make hiring effective.
- Is the candidate passionate about going to work for you?
- Did they do pre-interview research to inform themselves about your company?
- Are they enthusiastic during the interview?
- Do they illustrate their talent and passion with stories about previous experience?
It’s the answers to these types of questions that help evaluate whether a potential employee wants to work for your organization or is just looking for a job.
Often, you can find employees just by contacting folks you already have relationships with.
Dial up some of your business colleagues or post an update on LinkedIn informing your contacts of your hiring needs.
CURRENT STAFF IS A GOLDMINE …
Your current staff represents a goldmine for finding new employees.
Institute a referral program in which team members can earn cash rewards for referring a new hire.
Just make sure you advertise the dollar amount as “after-tax” — there’s nothing worse than employees thinking they just made $1,000 only to find out that a good chunk of it is going to Uncle Sam.
When using social media to find candidates,
LinkedIn should be your first stop.
After that, check any potential hires for inappropriate Facebook postings, as well as negative or offensive tweets.
Be sure that you do not factor any protected class information into your hiring decisions (gender, race, religion, age, disability, origin, or pregnancy).
Retaining or hiring during this “Great Resignation” is difficult and requires real creativity.
If you find yourself falling back on the old ways of doing things or on “policy” it may be time to get some help with “out of the box” thinking.
Revitalization Partners Can Help You With That …
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
Small Businesses Must Embrace Digital Technology to Survive in a Competitive Marketplace
It’s no secret that businesses have had a very difficult time surviving during the pandemic and in fact, many have gone out of business.
On the other hand, many small to medium size businesses have not only survived, they have actually prospered, by embracing the use of digital technology.
According to a recent Salesforce annual “Small and Medium Business Trends” report, 71% of growing small and medium businesses (SMB) survived the pandemic by going digital, and 66% say their businesses could not have survived the pandemic using technology from a decade ago.
ENCOURAGING RECENT SURVEY …
This information is particularly encouraging given a recent survey conducted by the National Federation of Independent Businesses (NFIB), which revealed that roughly one-in-five small-business owners said they will have to close their doors if economic conditions don’t improve in the next six months.
It is readily apparent that the pandemic has fed a global spike in e-commerce and online businesses as worldwide lockdowns have forced consumers to turn to online buying for everything from everyday products to carry-out dining. This, in turn, forced businesses to rapidly develop creative strategies, particularly by utilizing technology and online software to attempt to meet the significant change in consumer demand.
83% of SMBs now have at least some of their operations online
As a result, Salesforce found that 83% of SMBs now have at least some of their operations online; and of those, nearly all (95%) moved a portion of their operations online in the past year.
“They prioritized their customer needs and their wants, and whether they realized that customers want the option, they wanted the flexibility to interact with businesses and services, either online or in person,” Enrique Ortegon, Salesforce’s SMB senior vice president, told Yahoo Finance Live in a recent interview.
NEED FOR DRAMATIC ADJUSTMENTS …
Businesses who have attempted the transition from in-store to online commerce have had to dramatically adjust their approach to addressing their customers’ needs. First, they have had to rapidly make the change to an on-line customer friendly product delivery platform and communicate this transition to their customers.
They have also had to have some ability to use technology to communicate availability of inventory and/or products they have available to offer their customers when they attempt to order online.
Furthermore, they have had to adjust their consumer marketing approach to include online technology for marketing promotions and changes to their product offerings to their customers. They also had to use digital technology for acquiring new customers.
Just sitting by the phone and waiting for it to ring will no longer get the job done.
REVITALIZATION PARTNERS HAS EXPERIENCE …
Revitalization Partners has worked with a number of businesses in helping them develop strategies to make the transformation to a digital business.
Most companies have a wealth of data on current or past customers. We worked with them to capitalize on available information to develop and test outbound marketing programs.
These programs use a combination of existing customer information as well as information from prospective customers to develop profiles to target companies that are more likely to purchase from the business.
These profiles are developed to determine the characteristics of those that are most likely to purchase and to target the products and services they might be interested in.
This information is then used to develop a targeted outbound marketing campaign using email and other media sources to increase revenue. Our experience has been that by using this approach, there is a greater likelihood of increasing revenue and profitability.
THRIVE WITH DIGITAL TECHNOLOGY …
Many businesses have managed to survive and even thrive during the pandemic by using digital technology to rapidly adapt their business format to be responsive to the changing needs of their customers.
a process that is well thought through and that measures results
The focus must be based on developing a strategy to plan and execute these changes with a process that is well thought through and that measures results.
Our experience in helping companies develop digital strategies reinforces the notion that a plan is only as good as the day it’s written.
It has to be developed and modified as required to keep up with a rapidly changing marketplace.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
The Debt Ceiling and Default
The easiest way to spark a financial crisis and wreck the US economy would be to allow the federal government to default on its debt.
It would be an epic, unforced error and millions of Americans would pay the price.
And yet that unlikely situation is once again being contemplated. If Congress doesn’t raise the limit on federal borrowing the federal government will most likely run out of cash and extraordinary measures in October the Treasury Secretary warned lawmakers.
In short, a default would be an economic cataclysm. Interest rates would spike, the stock market would crater, retirement accounts would take a beating, the value of the US dollar would erode, and the financial reputation of the world’s only superpower would be tarnished.
A FINANCIAL ARMAGEDDONDON …
“It would be financial Armageddon,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “It’s complete craziness to even contemplate the idea of not paying our debt on time.”
Lawmakers in Washington are again playing chicken with America’s creditworthiness. And the path to raising the debt ceiling is not clear.
Even though Congress has in the past raised the debt ceiling with a bipartisan vote, Senate Minority Leader Mitch McConnell vowed in July that Republicans will not vote to raise the debt ceiling.
Lest you believe that this is about money, it’s not.
McConnell has stated that he doesn’t want to fund the Democratic large spending proposals. That may be true, but it has nothing to do with the debt ceiling. The debt ceiling is to allow the United States to pay the bills for money already spent.
The Democrats claim that since most of the money was spent during the Trump years, the Republicans should help pay the bill. That is only partially true as anyone who bought a bond with a due date longer than five years was owed money prior to the Trump administration.
DAMAGE AMERICA FOR 100 YEARS …
JPMorgan Chase (JPM) CEO Jamie Dimon urged lawmakers not to even think about going down this path.
During a hearing in May, Dimon said an actual default “could cause an immediate, literally cascading catastrophe of unbelievable proportions and damage America for 100 years.”
The Treasury Secretary stated that history shows that waiting “until the last minute” to suspend or increase the debt limit “can cause serious harm” to business and consumer confidence, raise borrowing costs for taxpayers and hurt America’s credit rating. “A delay that calls into question the federal government’s ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets.”
A US default would undermine the bedrock of the modern global financial system. “We pay our debt. That’s what distinguishes the United States from almost every other country on the planet,” Zandi of Moody’s said.
Because of America’s long track record of paying its debt, it’s very cheap for Washington to borrow.
HIGHER BORROWING COSTS …
But a default would force ratings companies to downgrade US debt and shatter that borrowing advantage.
Higher borrowing costs would make it much harder for Washington to borrow to pay for infrastructure, the climate crisis or to fight future recessions.
And refinancing America’s nearly $29 trillion mountain of existing debt would become that much more expensive. Interest expenses, which totaled $345 billion in fiscal 2020, would quickly rival what Washington spends on defense.
Soaring Treasury rates would set off a chain reaction in financial markets. That’s because Treasuries, viewed as risk-free investments backed by the full faith and credit of the federal government, serve as the benchmark by which virtually all other securities are measured.
A KEY BENCHMARK …
Not only would millions of Americans lose money in the stock market, but it would suddenly become more expensive for families and companies to borrow.
That’s because Treasuries serve as the benchmark for mortgages, car loans, credit cards and corporate debt. A spike in borrowing costs is a huge problem for an economy that relies on access to credit.
If the debt ceiling is not lifted, then the federal government will technically default on some of its obligations. It would be forced to prioritize payments, deciding who will get paid and who won’t.
Ultimately, someone will lose out, whether it’s federal employees, veterans, Social Security recipients, defense contractors or small business with government debt.
PLAYING POLITICS …
“Playing politics with the debt ceiling is always a bad idea,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading, “but it is a uniquely childish notion given where we are with the virus and the economic recovery.”
In other words, a debt ceiling crisis, let alone an actual default, is the last thing the recovering economy needs right now. Especially when small businesses are facing the future without new government funding.
And, if a government shutdown occurs and those existing loans cannot be forgiven in a timely manner, even those businesses that would qualify for new debt would either have to wait until those loans are resolved or, at best, pay interest rates that reflect the increased risk to the new lenders.
This could accelerate and increase the depth of projected bankruptcies and receiverships.
Maybe it’s time to tell our politicians that if they want to play childish games, it’s time to go home and play them in their own backyards.
We shouldn’t elect children to represent us.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
