The Company We Keep With Quentin Olde

As economic headwinds, rising interest rates and market volatility test even the most robust business models, corporate resilience has never been more critical. In this edition of The Company We Keep, we speak with Quentin Olde, Senior Managing Director at Ankura, about the early warning signs of distress, the art of balancing stakeholder interests and the strategies that can turn around even the most challenging situations.

Q1) What are the most common warning signs you see in companies heading toward insolvency, and how early can advisors realistically intervene to change the outcome?

A number of factors can lead companies into financial difficulty. Sometimes the cause is internal, such as poor management or decision-making, other times it is external, like economic conditions or a one-off event such as a regulatory change or tariff. Whatever causes the stress, the indicators are often the same. I look at them in three broad categories, and whilst often interrelated, each can independently signal distress.

Organisational and Cultural Signals: High staff turnover, absenteeism, low morale, or leadership instability i.e. the departure of a CFO or CEO or short tenures in senior roles, or just poor decision making – can all be red flags. Reputational damage or a negative market perception can also suggest deeper issues.

Operational and Strategic Issues: Which again, could be caused by internal or external factors things like falling sales or loss of major clients, strategic errors leading to overstocked inventory or obsolete inventory, and difficulty collecting debts leading to extended cash conversion cycles. Rapid growth without capital, systems and processes to keep up with it sometimes called 'growing broke'.

Finally, Financial signs: Declining or negative cash flow, caused by a mismatch between inflows and outflows, high levels of aged payables or receivables indicating poor working capital management and cash flow pressures, breaking debt covenants or increased reliance on short term funding like overdrafts for long term funding needs. The inability to meet obligations such as tax, superannuation, or wages on time as well as repeated or ongoing trading losses without any real changes being made to improve the position.

The market for restructuring professionals has changed dramatically over the last 10 years or more. Advisory firms now offer a varied toolbox of solutions which can help companies avoid insolvency and minimise the impact on the business. The most critical factor is early detection and intervention with decisive action as early as possible, so critical decisions and changes can be made. Many businesses ignore or misinterpret the signs until it's too late. Advisors can help stabilise and even revive a business if brought in early enough.

The earlier the intervention, the broader the range of options available, including cash flow restructuring and exploring alternative financing structures of options including the use of invoice factoring and asset-based lending. For this reason, we have a debt advisory offering embedded within our restructuring team, supported by a broad network of capital providers and market participants who can provide refinancing and funding solutions. Then there are operational turnaround plans ranging from long term restructuring of the business using performance improvement professionals to improve supply chains and operational efficiency to creating liquidity through quick wins and cost-out measures or exploring options like liquidating inventory, selling non core business units to refocus on core business and debt refinancing or equity raising.

Liability management is becoming an increasingly used buzz word as advisers look for ways to move risks off the balance sheet so a business can survive. Sometimes the solution is to offer the whole business up for sale or explore M&A opportunities by merging with a competitor or global player to avoid insolvency, improve supply chains, gain additional IP or recapitalise the balance sheet.

Q2) How do you balance the often-competing interests of creditors, employees, directors, shareholders and lenders during a complex formal or informal restructuring process?

Every restructuring is different and in order to preserve value complex situations require a structured, transparent and strategic approach. In my view successful restructures have three key elements;

1. Committed stakeholders
2. Access to funding
3. Execution through strategic planning and ongoing flexibility in decision making

The same issues apply to a formal restructuring (i.e. through Voluntary Administration and a Deed of Company Arrangement ("DoCA") or Scheme) as to an informal restructuring done before an insolvency using Safe Harbour or other tools available.

The key is to establish a clear hierarchy of priorities, such as understanding the legal obligations and rights of parties including the employees, secured creditors and other parties who may have statutory priorities. Then an understanding of the rights and obligations of key stakeholders, contractual counterparties and creditors must be balanced with the fiduciary duties of directors to act in the best interest of creditors and make the call if necessary.

It is critical to understand the position of these groups and undertake a stakeholder mapping process so you can develop a structured communication plan (VECTOR can help here). Identify all stakeholders and their interests, exposures and influence. Maintain transparent, consistent communication to build trust and reduce resistance and if necessary, use stakeholder committees (i.e. employees or secured creditors) or working groups to involve key parties in decision making.

The range of tailored restructuring tools available means options are endless, for example creditors may accept debt-for-equity swaps, moratoriums, or partial repayments. Employees may be retained via incentive or redeployment plans, preserving morale and continuity. Shareholders can be incentivised even if diluted to support the process by retaining some value if turnaround succeeds. Lenders, too, are increasingly open to restructuring tools such as PIYC (pay-if-you-can), PIK (payment-in-kind), or debt rescheduling.

The use of independent restructuring advisors or insolvency practitioners is often looked at favourably by stakeholders as it ensures objectivity. For example, the Safe Harbour provisions in Australia allow directors to explore restructuring without breaching insolvent trading laws—if they engage early, act responsibly and have a plan signed off by, and monitored by a professional.

Scenario Planning and Contingency Management are critical. Modelling multiple outcomes (e.g. going concern vs. liquidation) to demonstrate to stakeholders the value of cooperation. Data-driven forecasts help justify the concessions being asked for... in restructuring there are always concessions.

The overarching goal is to maximise enterprise value and minimise losses for all parties by giving the business a viable path forward so jobs are preserved and creditors recover more than in liquidation.

Q3) Can you share an example of a turnaround that seemed unlikely but succeeded — and what factors made the difference?

This is a tough question. One thing competent restructuring advisers do is try to "keep it real", providing honest and direct feedback to companies and boards about the options available and their likelihood of success. A key part of any good restructuring is contingency planning, the process of working out what steps to take, and when, if the original plan doesn't go as expected. Contingency plans may include pivoting from one option to another, but they may also include having to "call it" and make the decision to appoint administrators or take other protective measures to safeguard assets, minimise losses and prevent further claims against the board for insolvent trading.

As such our approach is more likely to see realistic and achievable restructurings fail when they should not have. This happens when one or more stakeholders is inflexible or misinformed about the consequences of certain outcomes or decisions. A poorly advised stakeholder or a party calling their bluff can often lead to poor decisions and even poorer outcomes. For this reason, any complex restructuring requires clear, concise and open communication with stakeholders. When that communication or trust breaks down, things can go off the rails.

A good example is found in the accuracy and veracity of financial forecasting during a restructure. The temptation to be optimistic must be met with the need to be realistic, honest and pragmatic. Many otherwise viable restructures stumble at the first hurdle when financial results for the initial quarter come in well below expectations, particularly if those numbers deviate significantly from the forecast presented only weeks earlier. Similar issues can arise with asset valuations, process timetables, regulatory approvals or the assessment of risks or legal positions. For this reason, the use of independent restructuring advisors or insolvency practitioners is often looked at favourably by stakeholders as it ensures objectivity and independence in the process.

Q4) With the likelihood of rising interest rates and economic uncertainty, are you seeing any shifts in the types of industries or business models becoming more vulnerable to insolvency?

This is the question we are always asked. My answer is normally to talk about business models first as opposed to industries.

The consistent theme we are seeing is certain business models are under pressure. Firstly, those that relied on or gorged on the cheap debt that existed post-COVID period offered through the rapidly growing private credit market. These firms are typically highly leveraged, having expanded aggressively during the low-rate era and are now facing unsustainable debt repayments.

Secondly, companies with light balance sheets, typically asset-light businesses such as early-stage startups, mining exploration and technology companies and others who rely on shareholders to fund growth and continue to risk capital for growth. When markets contract and companies can't show a clear path to profitability the founders, or investors often run out of steam and we have seen this a lot in recent times.

Finally, companies with heavy fixed cost structures. These may include expensive long-term leases, franchise obligations, offtake agreements, large workforces or high overheads. These models are often inflexible and therefore less agile in downturns.

So, with that in mind the industries we see having challenges include the following.

• Retail and Hospitality: Structural overcapacity, declining demand and increased costs shocks are accelerating insolvencies. Brick-and-mortar retailers and hospitality businesses with long-term and fixed leases are facing reduced foot traffic and declining per-head spend while trying to maintain high fixed costs. Wage inflation, supply shortages a slow rebound in business travel and a general decline in consumer sentiment and discretionary spending are further compounding the pressure.
• Startups (across mining, technology, biotech and others): Many of these businesses remain cash-flow negative and launched during a time of easy capital. With markets contracting and venture capital becoming more conservative, funding gaps are emerging, especially for scale-ups who have no clear path to profitability.
• Manufacturing and Logistics: These sectors are being squeezed by elevated input costs, ongoing supply chain disruptions, energy price volatility and the uncertainty of changing tariff regimes. With thin margins and limited access to credit due to being asset light, these businesses are increasingly vulnerable.
• Real Estate and Construction: High interest rates have cooled housing demand and increased borrowing costs. Coupled with significant increases in construction costs, wages and supply chain issues these businesses are struggling if not well capitalised. Even with house prices increasing those developers and builders with existing high leverage are struggling to service debt due to low margins and increased costs.

Q5) To what extent has Australia's Safe Harbour legislation achieved its intended goal of promoting a culture of corporate restructuring and innovation, rather than premature insolvency, among company directors?

Australia's Safe Harbour legislation, introduced in 2017, was designed to shift corporate culture away from premature insolvency and towards a regime of proactive informal restructuring. It provides directors with protection from personal liability for insolvent trading where it can be demonstrated that the pursuit of an informal restructuring plan is likely to result in a better outcome for stakeholders than a formal insolvency process.

The Safe Harbour process was designed to encourage early intervention by providing directors with breathing space to explore restructuring options without the immediate threat of personal liability for insolvent trading thus enabling informal restructures that preserve enterprise value and jobs. It is important to remember Safe Harbour is not a restructuring or a solution it is just the platform that creates the breathing space needed to allow a solution to be developed and executed.

Although the regime was initially slow to gain traction, it has contributed to a cultural shift. More directors and advisers now recognise seeking advice early and documenting a turnaround plan can lead to better outcomes than appointing an administrator. It has helped destigmatise the use of restructuring professionals, positioning early action as a strategic option rather than a last resort.

The COVID-19 pandemic was the real game changer. Many businesses affected by one-off shocks used Safe Harbour protection to restructure, pivot or negotiate with lenders and creditors in search of long-term solutions to short term challenges.

The Safe Harbour regime is now widely used in large and mid-market restructurings, particularly where independent directors or those with limited upside seek protection. The eligibility criteria (e.g., unpaid employee entitlements or tax lodgements), which disqualifies directors from protection does mean many SME's and smaller business cannot seek this protection. Additionally, small business owners are often "all in" with personal guarantees on loans and mortgages so the cost of seeking the advice and protection is outweighed by its benefit.

Whilst a 2022 review found that many directors were still unaware of the regime or unsure how to use it effectively. The adviser market has now gained confidence in using the process, it is used far more often than most people realise, although its confidential and informal nature means there is limited public data on its use or success rates, making it hard to measure systemic impact. Some critics claim the process should be disclosed, particularly for listed companies or to protect trade creditors – but doing so could undermine the regime, as disclosure might trigger credit tightening, supplier withdrawal or negative market sentiment, impacting customers, employees and other stakeholders.

Another current limitation is the lack of judicial review that has occurred with no real cases having directly tested the Safe Harbour provisions under section 588GA of the Corporations Act. This is not unexpected as there are few insolvent trading claims brought against directors and testing typically occurs only through litigation, which is often avoided if restructuring is successful of a Deed of Company Arrangement is implemented. and because Safe Harbour operates as a defence to such claims and not as proactive application and so any testing only arises in litigation, which is often avoided if restructuring succeeds or if a DoCA is entered into following the appointment of Voluntary Administrators.

Ankura has been involved in or led a significant number of Safe Harbour roles across a range of industries and company sizes, including multiple ASX listed entities and large global corporates with over $1bn in secured debt. The regime has successfully provided the platform and timeframe needed for directors to design, implement and execute the steps necessary to restructure a stressed or distressed company.

Safe Harbour works and we would encourage boards to engage early with advisers to determine whether this protection mechanism can provide the breathing space needed to explore restructuring solutions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.