Article

Keys to turnaround success

June 22, 2020 · Authored by Frank J. Walker

The tide is out

Prior to March 2020, businesses in the United States were at peak earnings as we were enjoying the longest expansionary period in our history. All the hallmarks were in place: significant M&A activity, recapitalizations, IPOs, new startups and general growth investments. The long expansion also meant that corporate leverage was at its peak, with the amount of non-investment grade leveraged debt in the U.S. more than doubling to $1.3 trillion between 2007 and 2020, and the dollar-denominated high yield bond market rising above 65% to $1.6 trillion during the same time period (JPMorgan Chase and S&P Global).

The combination of solid growth prospects, decreasing regulation, increasing valuation multiples and an abundance of available capital fueled this growth. Credit markets were robust – bank and burgeoning non-bank lenders were very much open for business. Now, we are all faced with a global health crisis that has caused a hard stop to the economy, and a rethinking of the path forward.

As Warren Buffett famously stated, “You only know who is swimming naked when the tide goes out.” The quote is apt to what many are unfortunately facing today. Much of the growth we experienced and returns realized through public and private markets were predicated on leverage. Many of these companies and their investors were utilizing proven corporate finance tools while others were banking on growth or speculative adjusted earnings. Many were betting on the next wave and instead got a receding tide.

Riding the lows

There are common themes to many of the businesses that were riding high and now are facing an acute downturn, with the inability to forecast the impact of the downturn being the principal theme. Without a clear plan and internal skills to meet the challenges ahead, businesses could experience significant value destruction. Otherwise successful businesses are now confronted by: