The background

A company in the service sector approached our team in RSM Cyprus, having been referred by an organisation that currently uses our services. A service that our client had found useful was our Independence Business Review (IBR) study, and it was this particular service that was of interest to the new business. However, during our consultation with this business, the conversation diverted to a larger problem that they were facing, their non-performing loans.

The challenge

As this specific case looked to be particularly challenging, we were quick to begin addressing the issue. In this situation, a renowned tertiary-sector conglomerate had merged its operations with those of another, both being similar types of firms within the industry. Together, these would then form a new legal entity in order to be more competitive, expand their service line and increase their market share, or at least that had been the original plan.

After the merger, all of the pre-merger companies' loans were transferred to the newly established legal entity, but therein lay the issue; despite their efforts, the new legal entity could not handle the large amount of loans. As a result of this, its operating activities began over lending, leaving it in a financially detrimental situation and without the ability to raise sufficient liquidity for its obligations.

The approach

In the turmoil of debts, the company's management team were struggling and reactively trying to cope with the situation; unfortunately, that was not enough. Even though they tried to negotiate with the financial institutions and requested payment extensions from the creditors, there was not a solid plan on the table to reassure the creditors that they could repay. The pressure and stress were enormous, the time frames were limited, and the expenses were running on.

With our key experience and knowledge of this market and the service sector, we began defining the best steps to start resolving the problem. We developed a sequence of actions that would enable us to tackle both the difficulties of the situation as well as fix the liquidity issues within the business by using a multi-level approach.

It was important to recognise that the problem did not solely lie in the overdue amounts of company loans to financial institutions. In fact, the issues had extended into all of the operations and departments within the business. The inability to pay loan debts had not only affected affairs with banking institutions but had developed into a multitude of issues, such as:

  • An accumulation of additional debt from bank charges due to an improper servicing of financial obligations
  • Delayed payments and increased debt to third parties, in addition to banks
  • Lawsuits from banking institutions
  • A decrease in operational activities due to a lack of working capital
  • An increase in sales costs as a consequence from a margin shortage due to the lack of an additional discount from suppliers
  • General adverse effects on the company's workforce
  • A decrease in the productivity rate of managerial staff towards business development, since their time was mostly spent on negotiations with suppliers' payments, debt collections, etc.

The multifaceted nature of these challenges required our tailored approach, which tackled the need for business reorganisation, as well as the loan restructuring procedures.

Our recovery approach's starting point was to improve the company's financial results via our business recovery services and, afterwards, reorganise and enhance the business operations.

Our business recovery approach included, amongst other things, the following actions:

  • Loan restructuring with all major financial institutions.
  • Enhancing the business liquidity and working capital.
  • Reaching settlement agreements with the company's preferential creditors.
  • Identifying suitable financial repayment periods within the safety margins of the forecasted cash flow.
  • Determining the ideal overdraft limits that would completely cover the payment deferrals whilst improving the company's liquidity.

For reorganising and enhancing the business operations targeting the increase in sales and profitability; we proceeded with:

  • Adopting operating costs controls and detecting non-recurring expenses.
  • Identifying the maximum amount per expense category and determining the costs.
  • Reducing operating costs by taking into consideration the business operation requirements.
  • Determining the procedures that aim to achieve the best possible performance that would tackle the liquidation problems and make the company workable.

The impact

Due to this case's complexity, the vast number of banking and financial institutions engaged, and the myriad accrued debts to creditors, the restructuring and reorganisation procedure lasted three years in total.

Following the appointment and the implementation of RSM Cyprus's recommendations, the company benefited from a 27% increase in revenue growth as well as a net profit increase (after taxes) of 18 times after only one year. In addition, the business's total debt was reduced by €15 million, from €18 million, resulting in an 81.5% drop in total borrowing. The residual €3 million of the loan will be repaid over a ten-year repayment plan, remaining within the safety margins that were set based on the projected cash flow.

Presently, the company is continuing on its growth strategy, recording significant increases in its financial development and efficiencies in its reorganisation. Their future is looking bright, and we cannot wait to see how they will thrive in the future.

For more information on restructuring assistance, please contact: Nicolas Agathocleous.