Financial restructuring key tool to recover post-COVID-19 -- EV

KUALA LUMPUR, Sept 25 -- As Malaysian businesses prepare for the post-COVID-19 era, financial restructuring is perceived to be a key tool to recover and improve profitability in the immediate term, says Ernst & Young (EY).

In a statement, EY said its poll on “Turnaround and restructuring: the banker’s perspective” highlighted that 77 per cent of respondents expect that in the next 12 months, business profitability is expected to improve but unlikely to be at the pre-COVID-19 pandemic levels.

It also revealed that respondents recognise the need to fundamentally change their business model to reflect the current market environment (77 per cent) and prioritise costs and revenue optimisation to manage business and debt obligations in the next 12 to 18 months (68 per cent).

“However, about 43 per cent of the respondents do not think or are uncertain that the debt level they are carrying is sustainable, suggesting businesses may need to restructure their debts once the loan moratorium ends,” it said.

Ernst & Young PLT senior executive director of turnaround and restructuring strategy Khoo Poh Poh said the government has initiated a number of stimulus packages and relief measures such as the loan moratorium to support businesses during these challenging times.

However, she said as some of the measures, including the loan moratorium, come to an end, there are clear concerns whether some of the borrowers would still be able to meet their obligations then.

The statement said as businesses continue to be impacted by the new normal, many are expected to restructure their debts after the moratorium ends.

“Banks have been proactively engaging with their customers ahead of the expiry of the moratorium.

“Yet, as some businesses embark on a financial restructuring route, some may need to recapitalise their businesses through a ‘white knight’ participation, while others may prefer to retain control via ‘self-rescues’, focusing on new business models and operational turnarounds,” it said.

A “white knight” is necessary when the business is operating in a weaker sector that requires new monies and business to recapitalise its business, said Ernst & Young Solutions LLP partner of strategy and operations Sriram Changali.

“White knights do not only bring in new monies and business, but in some cases, new competencies and skills to complement existing management.

“However, there are downsides when a white knight is involved in a financial restructuring exercise. To ensure the white knight’s investment is commercially viable, the existing shareholders and creditors tend to take higher haircuts and experience lower returns,” he said.

-- BERNAMA