The current COVID-19 health crisis, coupled with the economic and social crisis we are going through, is unprecedented. As the crisis and its economic impact is lasting longer than expected, many experts agree that companies will need to adapt to this new economic context. In a substantial number of businesses, a restructuring/downsizing is becoming unavoidable, certainly with the 2nd lockdown we are going though right now...

Corporate restructuring is not a recent phenomenon. In order to preserve the going concern of the business, companies need to align their structure to this new uncertain environment which is likely to continue over a longer period than initially estimated.

Let's look, however, at the context of this year 2020, which is unquestionably out of the ordinary. The COVID-19 crisis has significantly shaken the Belgian entrepreneurial landscape, especially for those companies being directly exposed to the consequences of a lock down period. During the first wave however, numerous governmental measures were taken to support businesses:

  • The economic unemployment measures allowed companies to mitigate part of the personnel costs.
  • Financial institutions and lenders support through a guarantee mechanism of the Federal Government provided (1) bullet loans with a maximum of 1 year and (2) standstill on capital payments of existing loans until the end of December 2020 while the interest remained due.
  • Delaying payments of VAT, social security and the income tax on wages towards the following quarters or the end of the year provided additional liquidity headroom to companies.
  • Regional governments in Flanders, Wallonia and Brussels also supported businesses with lump slump compensations and allowances.
  • Regional government backed investment vehicles such as PMV and Sogepa also provided relief with specific Covid guarantees or subordinated loans.

These measures have made it possible for companies to compensate for the loss of revenues and to an extent maintain a level of acceptable liquidity. As such it has been possible to limit the number of immediate bankruptcies or judicial reorganisations. During the first six months of 2020, the number of bankruptcies fell by 30% compared to 2019. Atradius points out that this decrease is however artificial, due to the measures taken by the various governments to counter the economic impact of the first lockdown period.

We understand the new federal government is currently contemplating repeating much of the same measures for this second lockdown period and regional governments are also rolling out new measures. This much needed lifeline will off course have its effect on those companies that are heavily impacted by this new lockdown period but for some the liquidity has been so tight over the last months that further insolvencies will be unavoidable.

Beyond the current context

Trying to withstand turbulence or, conversely, trying to seize the opportunity of the new economic situation is common in the lifecycle of a company. Economic crisis or not, restructuring, i.e. reorienting your organisation to new market conditions, is often the way forward. A first step is always to be able to identify the first signs of distress or even anticipate them.

A step by step approach

Afterwards, it is safe to say that each turnaround requires different solutions and each trajectory is different. Turnaround processes can go from workforce reductions to mergers and acquisitions, redesigning operating models and internal reorganizations. Turnarounds can even be applied to healthy companies that are experiencing structural difficulties, but they are mostly aimed at companies in difficulties. Although there are numerous solutions, the goal of every turnaround remains the same, that is to protect and optimize your business while minimizing the negative impacts.

A defined strategy

In a turnaround process, we can distinguish the following five phases.

  • Taking a step back. The aim is to prepare for a transition stage in order to take measures adapted to the problem encountered.
  • Definition and announcement of the action plan. This stage is crucial because it initiates the change. In this stage it is essential to communicate both internally and externally and insist on the positive effects of a reorganization.
  • Finally, the transition begins by unwinding the current business model. These changes can sometimes take away employees’ day to day structure and can be destabilizing.
  • Logically, this phase is followed by rebuilding. The new structure will be put in place and employees will gradually take their positions. New missions, new objectives, but also sometimes departures and/or layoffs. Transparency is the order of the day, because both acceptance and rejection are possible.
  • The final phase is the integration phase. It seals the new organization and the beginning of a new life cycle for the company.

External support to support your successful turnaround

In addition to following the above-mentioned key phases you also need to have an experienced team to deliver the results. The stakeholders will need to feel comfortable on the team that will execute the turnaround plan and will often seek outside support from experienced professionals that have prior experience in such processes.

The important thing is to minimise your risk. A well-managed restructuring process allows a company to structurally move forward to secure efficient and effective results.

Back to today’s reality

Coming back to the current situation there are still plenty of variables that impact the position of a lot of companies which might seal their faith and thus fall into bankruptcy or not. As such their actual level of liquidity headroom, the level of new measures by the various governments to support businesses at large, the evolution of the underlying business confidence as well as consumer spending will define a potential second wave of insolvencies in the coming months.

According to the latest estimates of Euler Hermes (Allianz group), one of the world leaders in credit insurance, a total of 11.490 companies will cease to exist in Belgium in 2020 (i.e. 20% more than in 2019) and 11,680 next year, which represent more than 23,000 bankruptcies by the end of 2021.This represents a 10% increase at the end of 2021 compared to the pre-Covid situation in 2019. At the same time, 76,000 jobs are directly threatened.

Nevertheless, it is beyond dispute that the long-term effects of the pandemic, together with the lack of short-term or even medium-term perspective is weighing on businesses. We are therefore convinced that businesses should reflect on tackling structural underperformance issues today rather than tomorrow in order to mitigate the negative impact of the current uncertainties.