1. Debt and equity offerings
Accessing capital through public or private debt and equity offerings is a common mitigation strategy. Although it might enable continuity, the probability of a successful debt or equity offering will depend on the company’s ability to access debt and equity markets on commercially reasonable terms and for the needed amount. Such plans are therefore generally considered less probable to be effectively implemented unless they are completed before the company’s filing date.
Alternatively, entering into collaborative arrangements with strategic partners can be a non-dilutive source of funding that might provide the capital needed to keep the company liquid and able to fulfill its short-term obligations.
2. Renegotiating existing arrangements
Companies with a limited ability to access new debt or equity financing might consider renegotiating the terms of existing arrangements with lenders and investors. Negotiating waivers, credit facility expansion, settlements and stock/debt transactions are actions to consider. Similar to accessing capital, the company’s ability to get commercially reasonable terms will determine the probability of a successful renegotiation. Such renegotiations may need to be completed before the company’s filling date to be effective.
3. Selling, leasing or monetizing assets
When the current economic environment results in assets being underutilized, the company might reconsider buy-versus-lease decisions and explore sale-leaseback opportunities. Leasing is a common short-term cash flow solution that doesn’t require the use of the company’s own funds. Sale-leaseback transactions generate cash by selling assets but provide access to the assets through a leaseback arrangement.
The company's customers are also likely affected by the current market disruption, so cash collection periods are likely to increase. Companies might consider factoring or securitizing receivables to accelerate cash inflows from trade receivables to fulfill short-term commitments.
4. Divestitures
Proceeds from selling assets can be used to repay debt and decrease debt service to relieve pressure from the company’s cash-flow forecasts. An understanding of the company’s key value drivers is fundamental to a successful divestiture. Selling a business or group of assets to secure short-term cash should not jeopardize the potential for future long-term growth when the economic environment stabilizes.
The current economic disruption might put pressure on asset and share prices. If assets are sold at substantial discounts, management should be aware of the potential asset impairment implications.
5. Strategic cost cutting
In times of economic uncertainty, companies will have to evaluate cost cutting measures. Strategic cost cutting can help prepare for growth, but it is critical to identify and understand the differences between bad costs, good costs and the best costs. Once a company’s costs are classified, strategic cost cutting becomes a process of minimizing exposure to bad costs and maximizing investment in the best ones.
Management might also consider other measures, such as CAPEX rationalization and changing working capital terms. It is important to understand that some of these variables are co-dependent, and careful thought should be given to other resulting consequences. For example, management should consider topline impact as a result of cutting CAPEX.
Cost cutting measures generally need to be approved before management is able to consider the probability of such plans effectively mitigating the underlying conditions or events.
