KordaMentha – TMA Australia Turnaround Survey 2019

September 2019 KordaMentha – TMA Australia Turnaround Survey 2019

Turnaround environment

The annual KordaMentha – 2019 is our ninth survey, which features both the current trends in business turnarounds, and an outlook towards Profile of respondents TMA Australia Turnaround 2020. These summary results cover the following topics: Survey provides an insight Board or Management • Australia’s turnaround environment, including: Equity holder/Distressed investor/Private equity investor into the causes, challenges –– industry outlook Lender/Debt trader Corporate adviser 1% –– turnaround funding Lawyer and successes of Australian 4% –– impact of industry reforms and other 8% 8% 11% corporate turnarounds. macroeconomic factors. 118 • Details of turnaround case studies, including: respondents

–– causes of distress Insolvency 42% 25% professional Turnaround –– operational solutions service provider –– turnaround leadership attributes.

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Key insights

01 02 03 04 The retail, construction and The significant trend away from Nearly half of respondents Turnaround clients are prepared manufacturing (non-mining) existing lenders towards ‘non- consider that the Safe Harbour, to pay for the best. Only 23% of sectors were again identified traditional’ funding sources has Insolvency Law Reform Act, and respondents identified ‘cost’ as as the industries most likely to strengthened. Ipso Facto reforms have had no an essential advisor factor for decline over the next 12 months. impact on the turnaround industry. turnaround clients.

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Turnaround environment

Industry outlook Turnaround funding Percentage of respondents expecting Percentage of respondents that viewed these industries to decline finance sources as active

Retail 87% 87% 84% 79% 79% Construction 75% 74% 71% 69% 64% 60% Manufacturing (non-mining) 55% 45% Agriculture/food 30% Media and telecommunications 27% Transport and logistics 26% Mining and resources 18% Hedge funds/private Mezzanine or Full debt Equity injections New debt from equity/special subordinated debt re- financing/ existing lenders Energy and utilities 16% situations funds recapitalisation from new lenders Health and related services 15% 2018 2019

Unsurprisingly, respondents expect the Retail and Construction sectors to face even 25% of respondents believed the availability of external financing for turnarounds had greater headwinds during FY20. The outlook for all industries deteriorated from the deteriorated over the last 12 months. This compares with 14% of respondents at the prior survey, with the exception of Media and telecommunications, Energy and utilities, time of the last survey. and Health and related services. The significant increase in activity levels of ‘non-traditional’ funding sources has continued, with existing, traditional lenders continuing to withdraw from the market. 39% of respondents identified that ‘Hedge funds/private equity/special situations funds’ were ‘Highly active’, with the next highest being ‘Mezzanine or subordinated debt’ with 17% of respondents identifying this source as ‘Highly active’. 55% of respondents identified ‘New debt from existing lenders’ as not being an active source of funding (up from 40%).

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Industry reforms and other macroeconomic factors

Impact of industry reforms

Percentage of respondents who Consideration of Safe Harbour Number of occasions that consider reforms have had an by the Board in the selected respondents have given Safe impact on the turnaround industry turnaround case study Harbour advice in past 12 months

Yes – it was the foundation N/A of the turnaround plan 3% Insolvency Law Yes – but it did More than 10 54% 43% not impact the Reform Act 14% development of 6–10 11% 6% the turnaround 3% 0 plan 5% Safe Harbour 47% 47% 38% 44% 2%

Ipso Facto 51% 47% 48% 36% No – it was not considered 1–5 Significant Moderate No impact

Nearly half of respondents believe recent reforms have Respondents’ suggestions to improve the uptake of Safe not had an impact on the turnaround industry. This Harbour by Australian company directors included: compares with respondent expectations at the time of • expand education of directors the last survey, when only 21–31% expected the reforms to have no impact. • test cases in court • reduce the restrictions • expand the protections available to directors from seeking appropriate advice beyond just insolvent trading protections.

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Industry reforms and other macroeconomic factors

Percentage of respondents who expect Financial restructure strategy impact on Australian companies over implemented the next 12 months

Risk of Australian/global recession 39% Consensual Restructure 40% International pressure and events 17% Not required 28% China/US trade war 13% Voluntary Administration – DOCA 17% Low wage growth 11% Voluntary Administration – 444GA 5%

Actions from the Royal Commission 7% Other 5% Declining housing market 6% Receivership 4% Other 4% Scheme of Arrangement 1% Utilities prices 1% Environmental consumer pressures and regulation 1% The trend away from formal secured-creditor-backed appointments continued, with a Tax changes 0% formal restructure strategy being implemented in only 27% of turnarounds surveyed Artifical Intelligence and use of data analytics 0% (down from 37% last survey). Consensual Restructure was implemented in 55% of the turnarounds in the ‘retail and consumer services’ sector, however was not used at all in the ‘mining and resources’ The greatest threat to Australian companies over the next 12 months was identified as turnarounds. ‘Risk of Australian/global recession’. ‘Other’ strategies implemented by respondents included Safe Harbour plans, and Other non-domestic risks (‘International pressure and events’ and ‘China/US trade war’) solvency underwritten by parent entity. comprised the majority of other threats to Australian companies. Domestic factors such as ‘Declining housing market’, ‘Utilities prices’ and ‘Actions from the Royal Commission’ decreased in significance compared to the prior survey.

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Turnaround case studies

Profile of turnaround case studies

Company size – revenue Length of turnaround Initial investment horizon of the financiers/equity holders 24+ months 5+ years

< $50 million 18% 25% 0 to 3 years

44% $151 million 12 months 2.9 years average 56% average 56% average 53% 26% 12 to 24 months 1 to 12 22% > $50 million months 3 to 5 years

Industry breakdown Since 2018, the turnaround case studies have: Retail and consumer services 24% • continued to become smaller (2018 average revenue $166 million, 2019 average Other 13% revenue $151 million) Mining and resources 12% Property and construction 11% • become longer (2018 average length 10 months, 2019 average length 12 months) Health and related services 10% • shifted towards the Retail and consumer services sector. Manufacturing 6% Professional services 6% The proportion of long-term turnarounds (those with duration of greater than 2 years) Transportation and logistics 5% increased from 7% of case studies in 2018 to 18% in 2019. Energy and utilities 5% Oil and gas 2% Industrial and manufacturing 2% Media and telecommunications 2%

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Turnaround case studies

Retail and consumer sector turnarounds Causes of corporate distress • Once again, ‘Drop in demand and/or increased competition’ was identified as the Significant issue Contributing issue most significant issue (by 55% of respondents). • 50% of respondents for this sector identified ‘Leases and property costs’ as a Sub-par Board 41% 33% significant issue (up from only 23% in 2018). and/or management High fixed cost 32% 43% structure Property and construction sector turnarounds Poor execution of large • The most significant issue identified was ‘Inadequate financial control’ which 67% 32% 41% projects or acquisitions of sector respondents identified as a significant issue. This was followed by ‘Sub- Inadequate financial par Board and/or management’ which 56% of sector respondent identified as 39% 28% control significant issue.

Leverage/ 29% 38% unsustainable debt Manufacturing turnarounds Drop in demand and/or 29% 26% • The most significant issue identified was ‘Inadequate financial control’ which 60% increased competition of sector respondents identified as a significant issue. Interesting, no respondents Leases and for Manufacturing sector turnarounds identified ‘Leverage/unsustainable debt’ as a 17% 22% property costs significant issue. Digital 9% 12% disruption

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Turnaround case studies

Sector Top ranked turnaround initiative Importance of turnaround initiatives

Retail and consumer services Cost reduction – overheads Low Medium High

Cost reduction – direct costs Change management and operational transformation Cost reduction – overheads

Mining and resources Cost reduction – direct costs and overheads Divestment or closure of business unit Cultural and governance change Revenue Growth – existing products and/or markets Inventory management

Change management and operational Revenue Growth – new products and/or markets Property and construction transformation

The importance of cost-led, rather than revenue-driven, turnaround initiatives was again highlighted. Other initiatives that have a less direct financial impact, such as change Cost reduction (direct costs), Change management and cultural and governance change, were also identified as significant. Health and related services management, and Cultural and governance change

Revenue growth (existing products Manufacturing and/or markets) and Cultural and governance change

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Turnaround case studies

Impact of stakeholder groups on Essential advisor factors for the turnaround turnaround clients High Medium Low

13% 17% 18% 13% Decision and action oriented 83% 33% 30% 20% 43% Clear and concise communication 82%

36% 41% 50% Ability to develop high-level strategy 82% 26% 18% 53% Experience in similar distressed situations 78% 67% Experience working with financiers 63% 47% 41% 41% 38% 37% Industry or technical expertise 54% 17% Previous client/advisor relationship 36% Existing The Board New External New Existing Employees financiers management stakeholders financiers management team team Ability to gain operational control of an organisation 36%

Cost 23%

How was success measured There was a broad range of success measures used in turnaround situations. Survived 20% Non‑financial measures (e.g. ‘Improved risk and governance’ and ‘Improved culture’) Created time to fix larger issues 16% continued to featured strongly. Earnings increased (EBITDA, NPAT etc.) 13% There was a key theme of the importance of clear planning and stakeholder Improved risk and governance practices 12% communication. Respondents noted that clients valued advisors being decision– and action-oriented, and using clear and concise communication. Cost was rated the least Size of cost reduction 12% important factor, demonstrating that clients are results driven, not price dependent. Improved culture 11% Change of control 9% Increased return to stakeholders 6% Other 1%

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Turnaround case studies

Insights from the front line What worked well… … and what didn’t • ‘Working closely with executives, • ‘Not understanding that turnaround insolvency practitioners and is a journey, not a destination.’ financiers.’ % of respondents agreed that advisors played a significant role in the • ‘Culture change and implementation 91 turnaround. • ‘Having a Board that was open to the of governance and reporting regime.’ turnaround strategy.’ • ‘Working with incumbents that have • ‘Creative instruments to implement contributed to the issues.’ the restructuring.’ of respondents agreed that cash flow management was a key tool • ‘Trying to change culture and % to drive the turnaround. • ‘Clear plan, clear execution of behaviour of existing employees.’ 74 strategies.’ • ‘Reliance on limited internal • ‘Cross functional communication, resources within the business.’ extensive collaboration with expert • ‘Lack of strategic direction at the of respondents agreed that the turnaround involved staying flexible advisers and effective project % outset of the restructure.’ 67 and making a number of mistakes on the journey. coordination techniques.’ • ‘Change initiatives due to legacy • ‘Anticipating problems which were practices.’ not foreseeable by the clients and raising them early with a solution.’ • ‘Relationship with unions.’ of respondents agreed that the real action was on the front line – % not in the boardroom. • ‘Incorporating data analytics and • ‘Keeping existing CEO.’ 67 improved processes / financial • ‘Planning for increased revenue.’ controls.’ • ‘Slow board decision making • ‘Stakeholder management, and filtered messaging from of respondents agreed that the turnaround was longer and more % communications, union engagement management.’ 66 difficult than expected. and on the ground change implementation.’ • ‘Replacing the existing management team early.’ % of respondents agreed that trade union support was a key factor in 14 the turnaround.

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Contacts

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