During the first pandemic wave, the Italian government -similar to that of numerous other countries- intervened to guarantee liquidity to businesses and self-employed workers in the form of loans guaranteed -in various ways- by the state.

At the same time -as is well known- a moratorium on mortgages and leases was gradually extended and still ongoing.

These measures have certainly provided oxygen to the system even if the risk, albeit underway, that the quality of the credit may consistently deteriorate is very high.

The repercussions of the pandemic on corporate profitability and debt - as the Bank of Italy recently observed [1] - are very broad, but also heterogeneous. In this context, the Bank of Italy continues - the risks deriving from an increase in the vulnerability of companies are high, especially in the sectors most affected by the pandemic.

As clearly observed by the Prime Minister, Mario Draghi, in his speech to the Senate on February 17, “the Government will have to protect workers, all workers, but it would be a mistake to protect all economic activities indifferently. Some will have to change, even radically. And the choice of which activities to protect and which to accompany in change is the difficult task that economic policy will have to face in the coming months ”.

In this context it will be necessary to carry out a careful assessment of the companies to be supported; assessment that will not be able to rotate based on the social alarm caused by the extent of staff reductions, but will have to favor those companies that have concrete prospects for recovery.

The following pages, developed by the Crisis Center, together with its collaborators [2], aim to translate the steps that must be taken to select the companies eligible for targeted support into an operational process.

Methodological premise

Whenever for the first time we find ourselves examining the conditions of a company in difficulty, a structured process must be put in place that allows us to formulate a shareable and especially feasible restructuring process. Normally the intervention can be divided into two main phases: Phase I which concerns the "understanding" of the company and Phase II in which, in the light of the evidence that emerged during Phase I, a hypothesis of restructuring is formulated.
The main areas of intervention are described below for both phases [3].

Phase I - The "understanding" of the company in crisis

Understanding the causes of the crisis

This is a fundamental and indispensable step in order to set up the company's rehabilitation intervention. An incorrect understanding of the causes of the crisis would almost certainly lead to the drafting of an incorrect recovery plan which probably would not give the expected results. This phase is activated both through the carrying out of interviews with the directors and management in order to acquire the widest possible picture, and through the analysis of the historical and final data available both at the budget level and at the level (more in-depth and detailed) of reporting made available by management control, where available.

Market and competition analysis

This is one of the central points for understanding whether a company in crisis has the concrete possibility of returning to a profit-generating situation or if, on the other hand, it is inevitably doomed to the complete cessation of business. Given the complexity of the topic, below, without claiming to be exhaustive, a brief list of the main elements that can be considered in this phase is reported:

• analysis of the economic trend in the countries in which the company operates or simply markets its products;
• analysis of the specific markets in which the company operates. In this phase it is particularly useful to make use of projections of independent bodies specialized in the sector if available;
• study of historical data and prospective trends of the reference markets both with reference to average sales prices and quantities sold;
• competition analysis by product and by market;
• analysis of the positioning of the company and its products in the reference markets;
• analysis of new market trends.

As is natural, the above list does not exhaust all the checks to be carried out, but offers - with a good degree of approximation - a list of the main checks and analyzes to be performed to understand if the company has a good chance of maintaining and / or regain their market share. The examination could also reveal useful indications for formulating the appropriate sales projections in line with the information available. In some cases, furthermore, the examination may reveal useful indications about the advisability or not of continuing to operate in some markets or continuing to market certain products for which, for example, a strong contraction in demand is expected.
Product

An analysis of the product marketed by the company is essential to understand its market positioning. An obsolete product or in an already mature phase greatly reduces the company's chances of being able to recover the margins and market shares lost with the crisis. Comparison with competitors' products is essential, as is the analysis of the needs met by the company's products. The company's ability to innovate the product also through the development of new patents must also be assessed. Typically, companies with low product innovation capacity are usually subject to easier erosion of both market shares and industrial production margins.

State of production facilities

A company in crisis usually has machinery and production plants that require technological upgrades and extraordinary maintenance probably not carried out in previous years due to the corporate crisis. During the intervention, it is necessary to understand the amount of the necessary investments together with the urgency of the same. Inefficient systems, which require frequent machine downtime or do not have productivity characteristics aligned with the competition, will inevitably constitute a serious obstacle to the implementation of a company restructuring operation.

Analysis of the corporate structure

The examination of the corporate structure allows you to become familiar with the company and the group you belong to and allows you to identify the final decision-makers (often also majority shareholders) as well as the bodies in charge of control. It is not uncommon, especially in medium / large-sized groups, to have to deal with a more complex picture of the shareholding structure, consisting of holding companies and sub-holding companies, including those under foreign law, which in turn control the production or distribution of products. In these cases, it is very important to reconstruct the chain of control in detail, identifying, case by case, the reasons that led to the establishment of holding companies and other companies, including foreign ones. Normally the reasons that lead to the establishment of these groups fall into the following five macro categories:

• companies set up to comply with particular local legislative constraints (especially for non-EU companies);
• companies established jointly with other partners functional to the growth of the company or the group;
• companies established for reasons of commercial approach to the market;
• companies set up to take advantage of particular benefits in terms of production costs;
• companies established for tax planning purposes.

Understanding the groupogram is a delicate phase of the analysis process as, on the one hand, the managerial balances must be kept as unaltered as possible and, on the other, it is often also necessary to simplify these structures as they do not generate value for the shareholders, but vice versa, due to the management costs of the same, sometimes not quite contained, they contribute to “burning up cash”.

Organization chart and management analysis

This is an examination aimed at assessing the adequacy of the organizational structure to the needs of the company and the competence of the management, especially at the first levels, in the perspective of a possible restructuring hypothesis. It is not uncommon that during the examination of these profiles the need clearly emerges for the company to equip itself with adequate professionalism in addition to or in place of existing ones.

Analysis of the income statement

The activity concerns the analysis of the main components of costs and revenues that make up the company's income statement for the last 3 years. The analysis is performed both by calculating and using the main indices provided for by the accounting technique, and by comparing it with the competition indicators and still resorting to the direct analysis of certain items that may be peculiar to the company under consideration. Normally the items subject to verification are:

• volume and analysis of the revenue structure;
• existing contracts and order book;
• analysis of production costs and benchmarking with competitors;
• margin analysis by product / order;
• personnel cost analysis;
• fixed cost analysis;
• analysis of other management costs.

Balance sheet analysis

The activity concerns the analysis of the main items that make up the company's balance sheet for the last 3 years. As for the income statement, the analysis is performed both by calculating and using the main indices provided for by the accounting technique, and by comparing it with the competition indicators and still resorting to the examination of certain particular items. In practice, the items subject to verification are:

• analysis of the equity structure of the company;
• analysis of the sources and uses prospectus;
• financial cycle analysis;
• analysis of the warehouse and its enhancement;
• credit analysis and determination of the bad debt provision;
• analysis of payables to suppliers;
• analysis of tax and social security debts;
• analysis of the composition of payables to employees;
• analysis of the net financial position.

The extent of the checks to be performed must be assessed on a case-by-case basis and is largely dependent on the size of the company. For example, medium-sized and large companies involve a much higher level of complexity than small and medium-sized companies. In addition, it should be noted that it is now common practice, for the examination of tax and social security aspects, to make use of the intervention of specialized professionals able to analyze the corporate position in detail.

Phase II - The restructuring and the industrial plan

In the light of all the activities carried out in Phase I, it is necessary to question whether it is possible to proceed with a restructuring of the company. Leaving aside the examples of schools where it is easy to identify a path to follow, it is usually very difficult to make a decision. In addition to the elements already indicated, such as the market, the product, production and management, for the purposes of the decision some other elements that cannot be identified a priori are sometimes taken into consideration, such as, for example, the age of the shareholders, their concrete willingness to invest further "resources" in the company, the willingness of those who guide it to carry out the restructuring for a given period of time or, the aptitude to "step aside" when, for multiple reasons, a change of management is necessary . The presence of heirs of the current shareholders able, in the medium term future, to support or replace the current top management normally constitutes an additional element of evaluation. Furthermore, the company's ability to attract candidates from competent managers capable of holding important roles in the company must not be neglected. Finally, a careful assessment must be performed with reference to the expected attitude of the credit system towards the company undergoing restructuring, as restructuring can normally also be carried out with the financial support of the banking class.

As we have seen, the assessment of all the available elements involves the formulation of a final judgment on the feasibility of the restructuring operation, understood as the existence of all the necessary conditions so that it is possible to subsequently implement the plan industrial enterprise restructuring. It must be emphasized that, in some cases, directing a company towards a restructuring solution, rather than a liquidation solution, implies that, if the restructuring proves impossible to carry out on a factual level, the financial resources to complete a liquidation process, leaving bankruptcy as the only alternative to the company.

Once the existence of the basic conditions for proceeding with a restructuring has been verified, it is necessary to proceed with the drafting of an industrial plan in which all the phases and methods of the planned restructuring are explained. Indications are provided below on the most significant aspects that must be taken into consideration in the drafting of an industrial restructuring plan.

Cash burning

The crisis situation of a company usually manifests itself with the impossibility of meeting current payments with the financial resources deriving from the characteristic activity: in practice, a company in difficulty "burns cash", that is, it produces less cash than how much would be necessary to meet the payment of the obligations assumed. The persistence of a cash burning situation leads within 18 - 24 months to a point of "no return" in which the debt contracted with the various subjects (suppliers, banks, government) cannot be repaid through normal company operations . The factors that generate a cash burning situation are many, ranging from the classic situation in which a company makes losses and therefore consumes financial resources, to more complex situations in which considerations relating to the method of borrowing with credit institutions take place. (for example investments financed through short-term exposures) or situations of over-indebtedness in which the company is "loaded" with a debt that is already non-repayable at the time of its assumption, or new investments in complementary activities or for diversification made completely with the risk capital of third parties, the forecasts of which have proved to be manifestly incorrect. However, before proceeding to identify the interventions to be implemented for the purpose of restructuring, it is absolutely essential to identify and sterilize the elements that generate a cash burning situation in the company. Failure to identify and sterilize these causes usually generates the non-feasibility of the hypothesized business plan.

Sales forecasts

The driver of the restructuring is normally constituted by a prudent and reliable forecast of sales forecasts both in terms of quantity and in terms of unit prices. This activity is the focal point of any restructuring operation and is, to all intents and purposes, the most delicate issue to be addressed: consider, for example, that the forecasts relating to the procurement of raw materials and the need to resort to external processing services, as well as the correct sizing of the production company staff. As will be explained below, stress tests are often carried out to verify the resilience of the restructuring plan even in the presence of a decrease in assumed revenues, both in terms of volumes and unit price. It is good practice, whenever possible, to corroborate the sales forecasts with specific market studies carried out by independent third parties such as sector associations which are normally a reliable source of information.

The optimal production set-up: the sizing of the plants and the workforce

Based on the expected sales volumes, an analysis of the company's production capacity is carried out. From this analysis, the needs for the renewal and / or maintenance of existing plants usually emerge. In some cases, where production costs are higher than the market offer, it is also necessary to proceed with the analysis known as "make or buy" for the realization of part of the processing or for the purchase of semi-finished products. external. In most cases, there is an excess of production capacity compared to the expected sales volumes.

As regards the sizing of the production workforce, the number of pieces that the company must produce is normally obtained from the revenue forecasts. Starting from this data, through the management control, the theoretical standard need for manpower hours is then determined, from which, by dividing by the number of annual hours of work of a resource, the FTE (Full Time Equivalent) is obtained. , i.e. the amount of human resources required for the planned production. Often, the above procedure shows the need for a reduction of the workforce according to the expected sales volumes. In fact, over-staffing is often one of the recurring causes that generates crisis situations.

Raw materials and warehouse management

The procurement of raw materials is normally a sensitive issue, as the company in crisis on the one hand has accrued a significant debt towards suppliers of raw materials and, on the other hand, needs that they continue to deliver the material. Often, in such circumstances, suppliers stop applying market prices, making the company pay a sort of "premium" to cover themselves against their customer's default risk. The industrial plan cannot ignore the evaluation of these elements and must propose viable solutions (if not already formalized in some cases) that guarantee the continuity of supplies at market conditions that are at least acceptable and profitable for the company.

As regards the warehouse, particular attention must be paid to the necessary stocks according to the expected production volumes and reordering times. It should be noted that incorrect inventory management leads to an increase in working capital with a consequent absorption of finance.

Other management costs and general costs

With reference to the forecasts relating to revenues, the other management costs and general costs must also be sized in relation to the planned activity. All operations that do not create value for the company must be avoided.

The interventions that allow the company to return to "performing status"

The timely formulation of all planned interventions, both to bring the company back to profitability and to meet the payment of all or part of past debts, constitutes the heart of the restructuring. In summary, foreseeable interventions can be divided into at least four macro categories:

• interventions aimed at generating a profitability situation of the company with consequent generation of cash (free cash flow);
• write-off, consolidation and deferral of previous debts [4];
• divestment interventions of assets not necessary for the core business;
• financing or refinancing interventions of the company, also through subsidized lines of finance, if not - also - at least partially non-repayable.

With reference to the former, which has already been mentioned, here it is important to highlight that a correctly sized and managed company, in the presence of a product that has a market demand, at normal values, almost inevitably generates a profit and a consequent free cash flow.

As for the latter, it should be noted that they are functionally dependent on two majorities: on the one hand, the free cash flow that the company, once restructured, is able to produce annually; on the other hand, the time factor, ie the number of years in which it is expected to bind the freecash flow generated by the company to the total or partial repayment of the debts [5]. It should also be noted that in recent practice, in the presence of very high indebtedness, solutions are being spread that envisage participatory instruments of entrepreneurial risk, such as for example the transformation of part of the debts into capital of the restructured company or into bonds, in some cases even convertible. These are tools that can be used in coherence, for example, with ad hoc public policies.

With regard to interventions aimed at the disposal of assets not necessary for the performance of the core business, it should be emphasized that, if the proceeds are not directly functional to the financing of the core business, it can reduce the amount of the write-offs or consolidations that must be effected against the debts contracted by the company.

Finally, the last macro-category concerns the financing of the company by the shareholder structure and / or by the banking class. In this regard, it should be noted that the failure to grant the so-called "New finance" by the banking class can constitute a serious obstacle to the feasibility of the restructuring plan, which would therefore be denied access to the credit market.

The technical form of the restructuring

The legislation in force outlines a series of legal instruments through which to carry out the restructuring of a company. The choice of the most suitable regulatory instrument depends on a series of factors both objective (amount of debt, need to carry out write-offs or only consolidations, need and extent of the new finance requested), and subjective (credibility of the management, credibility of the restructuring project, perception of the sector in which the company operates, etc.).

Stress tests

The drafting of stress tests helps to assess the "degree of resilience" of a restructuring plan in relation to the change in some assumptions used for its drafting. In practice, a good restructuring plan is required to be able to meet debt payment commitments both in the presence of negative changes in average unit prices and expected sales quantities, and in the presence of increases in the average unit purchase prices of raw materials. or the assumed personal cost. There are no fixed rules that indicate which are the assumptions on which to perform the stresstest and which are the percentages to be used. Their identification is left to the sensitivity of the person in charge of the restructuring plan and to the Attestor who must ensure the feasibility of the restructuring plan.

To complete the above considerations, some reflections on the expected times for the realization of each Phase are reported below.

First of all, it should be immediately pointed out that the time required for the analysis and structuring of a reorganization operation depends very much on the size and complexity of the company under consideration. The examination of a multi-product company, which operates both in the domestic market and in the international markets, requires, as can be expected, longer times than a single-product company that operates exclusively on the national market.

Nonetheless, as an example, it is still possible to try to identify standard times for the completion of each of the two phases indicated above.

With regard to Phase I, in the presence of a medium-sized company (with about 35 million turnover) that operates both in the domestic market and in EU markets, it can be assumed that between 10 and 15 days of work are required from part of a team of 3 experienced resources. More specifically, the first part of Phase I, which concerns the execution of the analyzes, usually takes between 7 and 10 working days. However, the modularity of the intervention foreseen in Phase I, could lead to think that by increasing the number of team members, it is possible to obtain a reduction in the intervention times in this Phase. This last statement does not always correspond to the reality of the facts. Indeed, an increase in expert resources can certainly contribute, in certain circumstances, to reducing the timing of the analyzes carried out, but it must not be forgotten that the results of the analyzes must be evaluated in their entirety and be linked by a fil rouge that allows a critical evaluation. overall results of the individual analyzes and allows us to hypothesize a restructuring process. Therefore, the structuring of this last sub-phase, which follows that of analysis, regardless of the number of available resources, is normally carried out over a period of between 3 and 5 working days.

As for Phase II, the a priori formulation of timing is more complex. In fact, there are numerous factors to be taken into consideration for the purposes of evaluating the time frame that the preparation of the recovery plan can occupy. Among these, for example, it is necessary to point out the choice of the restructuring procedure, as the terms established by law for each of them are different. Secondly, the timing can be considerably lengthened, if the restructuring plan provides for a reduction in the workforce [6], which requires prior negotiations with the trade unions. The debt factor is also central: first of all, towards the banking class, especially in the event that it is necessary to maintain existing credit lines or to resort to new finance. Similarly, if the company has a significant indebtedness to the tax authorities, the instrument of the tax transaction could lengthen the timing, which could also be extended by any negotiations with suppliers, where the company is exposed to them and it is appropriate continue existing relationships. Given the above and taking into consideration the aforementioned elements, normally the drafting of an articulated plan can take place over a period of time between 6 and 24 months.

At the end of Phase I, however, you will be able to formulate a sufficiently reliable prognosis in relation to the possibility of undertaking a virtuous path to reorganize the company.

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[1] See the Financial Stability Report no. 1 - 2021.
[2] A special thanks goes to Restart Consulting s.r.l., for having made available its working method and its expertise.
[3] The following considerations refer mainly to manufacturing companies
[4] Past debts are defined as debts incurred by the company in the period of time preceding the restructuring.
[5] Normally the time frame considered is a maximum of 5 years.
[6] Similarly, some further corporate transactions also require the involvement of trade unions, such as, for example, the leasing of a business unit.