Restructuring – time for a change in direction?
A combination of factors in the current environment is challenging the economic sustainability of businesses and financial institutions large and small across Africa. Globally, the COVID-19 crisis and associated lockdowns had the effect of “calling the end of a long bull market” since the credit crisis in 2008. In most African markets, the bull market had already ended some years before the pandemic. In Africa, the pandemic has compounded the difficulties presented by weaker commodity prices, sovereign credit challenges, volatile exchanges rates and uncertain public policy regimes. From an investment perspective, there has been an increasingly “risk-off” investor approach to Africa in recent years that has only accelerated during the crisis and added “refinancing risk” to the multitude of other risk factors impacting companies.
While pervasive in influence, these conditions are impacting companies differently depending upon their strength heading into the crisis, as well as their exact business model and sectoral exposure. For the strongest performers – “top quartile” companies – the crisis is constraining the normal cash flow, causing challenges in the short-term, and lost profits. For bottom-quartile companies, these conditions have exacerbated bad debt positions, product deficiencies, operational inefficiencies and/or balance sheet weakness that now threatens their viability. For all companies, the crisis presents an opportunity (and in some cases an imperative) to reconsider the strategy. Should we be present in all our countries of operation or reinforce where we are strongest? Are we too dependent on one type of lender?
Coordination between creditors, as well as a responsible approach to negotiations, is incredibly helpful in the current environment to achieve the best possible outcome. One example of this is the memorandum of understanding agreed last month between many of the largest microfinance investment vehicles (“MIVs”) which provides a framework to resolve the issues arising from the crisis, to create win-win outcomes for creditors and borrowers. One complication is that many microfinance institutions now have a broader range of creditors than just MIVs – including development banks, local banks, and bondholders – each of which has very different frames of reference.
Advice that is important to companies in all categories includes to “act early”: completing a renegotiation with lenders takes time, especially if associated with other corporate actions as discussed above. Furthermore, a realistic and analytic approach to the problems is crucial. Are the challenges actually a solvency problem as much as liquidity problem? Furthermore, negotiations which straddle between different groups, sponsors, external shareholders, lenders of different types or seniority, and new investors, can be complex to manage. Verdant Capital is currently advising financial institutions and companies in Africa – top quartile, middle quartiles, and bottom quartile – to address the challenges and opportunities presented by the current crisis.
This article is a summary of an article published in the May 2020 edition of MicroCapital Monitor. The full article is also published under the “Opinion” section of our website.