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Corporate Turnaround –thinking beyond capital structures. Igor Zax, CFA, Sloan Fellow (LBS) Managing Director- Tenzor Ltd. Good Company- Bad Balance Sheet- does such thing exist?. Why did company end up with wrong balance sheet?

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Corporate turnaround thinking beyond capital structures l.jpg

Corporate Turnaround –thinking beyond capital structures

Igor Zax, CFA, Sloan Fellow (LBS)

Managing Director- Tenzor Ltd

© Tenzor Ltd 2009-2010

Good company bad balance sheet does such thing exist l.jpg
Good Company- Bad Balance Sheet- does such thing exist?

  • Why did company end up with wrong balance sheet?

    • Multiples are important, but volatility of the business is critical factor

    • Operational leverage even more important than financial one

    • There was a mistake in valuation once – why should one believe they are not making it again

    • If the whole market is undervalued, what value does PE investor brings in selection?

© Tenzor Ltd 2009-2010

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Why Turnaround?

Insolvency may be an efficient solution if there are substantial assets in the business (based on actual liquidation value) and they can be easily secured.

Otherwise, one needs to keep the company as going concern as the best way to recover- and this is not only lender’s decision.

To do so, one needs to answer why the company exists and how is it linked to its environment.

Bank lender makes a one-off decision to lend-supply chain partners making their decisions (including granting credit) every time

© Tenzor Ltd 2009-2010

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Five “C” of Turnaround

  • Control

    • Creditors seek to control assets and decision making

  • Capability

    • The team (existent, new or interim) need to be capable for the task

  • Credibility

    • Turnaround plan and the team need to have credibility with all stakeholders

  • Clarity

    • What is the company’s core business, how it fits with the industry structure and does the business model match it

  • Co-operation

    • Lending group are not the only stakeholders. Ongoing support from suppliers, customers, distributors and others are vital for survival

© Tenzor Ltd 2009-2010

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Industry structure and Supply Chain

Global industry structures changed massively

Platform companies "Produces nowhere but sells everywhere... know where the clients are and what they want and where the producers are. Platform companies then simply organise the ordering by the clients and the delivery by the producers (and the placing of their logo on the product just before delivery).“- GaveKal

Integrated and collaborative supply chains.

Contract manufacturing, outsourcing, muli-tier distribution

Changed structures are often ignored by analysts

© Tenzor Ltd 2009-2010

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Supply Chain- Distribution of Risk and Reward


Component Manufacturers

Component Distributors

Contract Manufacturers




  • Understanding the supply chain is core to determining the future of the company.

  • How is wealth and risk distributed?

  • What is outsourced to whom? Who does financing- is the company a bank? Should it be?

  • Is the issue overall health of the chain, distribution of rewards and risks at particular layer or just company specific issues?

  • Who can “shortcut” the chain and what would be consequences?

  • Who is going to loose the most if company disappear and what can they contribute to rescue?

© Tenzor Ltd 2009-2010 Confidential

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Rise of ABL

Cash flow lending was the main trend in the past. Today, EBITDA is much more volatile- not only reducing multiples, but also making cash flow lending unavailable in many areas.

Lending against assets becoming more used, especially where the value can be clearly determined.

Illiquid and long term assets are difficult to lend against-shorter term is easier.

“New Financial Engineering”- how to reduce the risk in transactions

Still, there are significant constrains on the supply of ABL credit.

© Tenzor Ltd 2009-2010

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Credit Insurance and Receivables Financing

In Europe, credit insurance is extremely important (domestic and export)

The supplier may not be the one making decisions

If cover is withdrawn, company can try to negotiate with insurer (to restore cover) and/or supplier (to continue sell uninsured) IF debt is current

If the payments are overdue, supplier may not supply or risk the claim not being paid...

Receivable financing is underutilised by suppliers-they paid for taking off the risk but did not use the financing available!

© Tenzor Ltd 2009-2010

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Working Capital Management

Loosing supplier credit is the major risk-do not provoke by late payment (but try to negotiate longer terms) and keep good communication. No supplier’s support-no deal.

Receivables are major asset- they need to be managed properly and financed were appropriate. Both quality and financibility of receivable book may be key in pre-deal due-diligence.

Manage inventories-but understand that many optimisation models assume risk free counterparties.

Analyse the product mix not only from profitability standpoint, but also working capital effect –and go out of products you can not afford

If the company is not right place for financing and risk, find one in the supply chain who can take it

© Tenzor Ltd 2009-2010

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Redesigning the Model -Distribution example

Credit Insurance?



What credit limit?







Distributor credit risk

This risk may be highly concentrated

Customer credit risk (if distributor has little capital)

Product liability (any case)





Working Capital Finance?

Risk mitigation???

Diversified risk?

Low concentrations?

Single vs. multi tier?

How do you finance receivables in EM?

© Tenzor Ltd 2009-2010 Confidential

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Distribution example

Credit Insurance-easier to obtain?

Invoice discounting?


We are in Europe!








Performance risk mitigation?

Distributor-now agent?

Diversified risk?

Low concentrations?

Single vs. multi tier?

No need to finance in EM?

Low working capital needs!

© Tenzor Ltd 2009-2010 Confidential

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Supply Chain and Turnaround Financing

The supplier (even a highly distressed) is a lender, providing next step in the chain (distributor, manufacturer, end user etc.) with credit through payment terms (sometimes they are the only or main source of credit).

Buyer of the goods can effectively provide money to the seller through reduced payment terms without taking risk (providing supplier fulfilled the contract).

This may provide a workable alternative to DIP (Debtor in Possession) financing, allowing in some cases to provide funds to distressed company without being affected by possible bankruptcy procedures

© Tenzor Ltd 2009-2010

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Supply Chain-its importance to creditors and turnaround investors

Company’s working capital needs depends from business model- and this can be changed (meaning less money needed to support the turnaround)

Transfer of risk on paper may be fiction –what we saw in financial services is becoming reality in the industry

Instead of distressed financing of troubled company, one can often finance healthy one (such as its distributor) with the same net effect but different cost and risk

One needs to be aware of cross border differences- for example there are more solutions for financing sales to Emerging Markets from the West than for domestic financing within Emerging Markets.

Sick companies in healthy chains have much higher chances of survival than in sick chains.

© Tenzor Ltd 2009-2010

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Why Vertical Integration? investors

Recent years show a global trend to “platformisation”

This was driven by lower transaction costs, supply chain coordination and general low risk environment

This is changing now, as risk is again high on the agenda, and transaction costs are up

Deals start coming - small and very large

Cost of acquiring supply chain partner may be lower than switching cost

Resolving of concentration problem- getting away from excessive dependencies.

A lot of supply chain optimisation techniques designed for a “risk free” world

In a risky world it is cheaper to have a solution within a firm- the very reason firms exist (Richard Coase, Nobel price in economics 1991)

© Tenzor Ltd 2009-2010

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Vertical Integration- Working Capital Implications investors

Buying a week player up the chain- moving from concentrated non- financeable receivables book to diversified

Merged company can finance receivables- target on its own find it difficult because of operational risks.

Inventories – can be managed down on elimination of bullwhip effect and reduction of safety stock to cover supply risks

Payables. If target facing withdraw of lines from suppliers or credit insurance, restoring of these can provide immediate working capital boost.

Working Capital may change tremendously in a successful acquisition, providing cash boost instead to cash drain to acquirer

© Tenzor Ltd 2009-2010

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Vertical Integration – why does this matter for distressed investor?

Vertical Integration is likely to be the main exit root – understanding its dynamics is key to success

Ability to “build to order”

“Mixed style” deals – buying distressed player up or down the chain may enhance growth investment and vice versa

Large efficiency gains are more likely for risky companies as cost of risk mitigation (buffer stock, credit risk mitigation, absence of close process integration, etc.) are reducing profitability

© Tenzor Ltd 2009-2010

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Thank You and Good Luck! investor?

Igor Zax, CFA, Sloan Fellow (London Business School)

Managing Director, Tenzor Ltd. (London)

Tel: +447775708426

E-Mail: [email protected]

Web site:

© Tenzor Ltd 2009-2010