When is the right time for distressed companies to restructure?

Saturday, 01 August 2020

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Zilla Efrat

    Corporate insolvency expert Stephen Parbery shares vital insights for directors confronting the rising insolvency risks.

    Stephen Parbery has seen just about every type of economic downturn in his long restructuring career, but the co-founder of insolvency specialist Prentice Parbery Barilla more than 38 years ago describes the one sparked by COVID-19 as “unique”.

    “In the past, there may have been sudden falls in share markets, but declines in real economies were far more gradual,” says Parbery, now a senior adviser to multinational financial consultancy firm Duff & Phelps. “With COVID-19, we saw revenues go to zero overnight across many parts of the economy. I haven’t seen that before.”

    What shocked him most was how quickly the COVID-19 downturn occurred and how unprepared businesses were for it.

    “Most businesses are experiencing similar issues to each other,” he says. “People feel challenged by COVID-19, but because most businesses are affected, they seem better emotionally than if they were alone in their challenges.”

    “There’s greater tolerance and empathy than in normal times of individual business, failure when directors often feel they have failed as individuals. On this occasion, people accept that no-one could have avoided this happening. It’s probably similar to what businesses endure during times of war.”

    Parbery says the difference is that directors don’t know when conditions will improve and can’t plan as they would in other circumstances. “That said, we do have access to capital and borrowings. Back in the 1980s and other periods when credit dried up, we couldn’t find a market in certain assets because people would not lend to purchasers and things just came to a halt. This time around, we haven’t seen any of that yet and hopefully we won’t.”

    Parbery says our continued economic growth means the banking system is strong and we have considerable US funds in our capital markets courtesy of bond holders, hedge funds and debt traders. “We’re dealing with a different set of stakeholders than we would have 30 years ago, which were the four major trading banks,” he says. “We now have stakeholders with totally different types of appetites in restructuring and the timespan in which to do it. They have far more flexibility in providing future support than, say, very regulated banks that must remain liquid and have less patient capital to deal with a number of workouts.”

    He also notes superannuation funds, especially Canadian pension funds, that are differently set up. “They are defined benefit schemes and can manage their cash outflows quite differently to Australian funds,” says Parbery. “Australian funds have to be more liquid because members need to convert their superannuation to lump sums or pensions.”

    Parbery — who was closely involved in corporate failures such as Ansett Australia airlines, ABC Learning childcare centres and HIH Insurance — believes some Australian directors have not acted quickly enough during COVID-19.

    Parbery's pivotal points

    • Keep proactive and meet with management more regularly.
    • Keep open credit lines and lines of communication with key credit providers.
    • Stay transparent and honest with key stakeholders and ensure stakeholders understand the risks of the business.
    • Focus on debtor collections and other realisable assets to build cash reserves.
    • Prepare shareholders for possible capital calls and changes in dividend policies.

    “I have often witnessed a ‘sit and wait’ attitude where directors and management have put their heads in the sand,” he says.

    Drawing on his long experience, Parbery notes a common theme in insolvencies is directors not bringing in external help. “They try to solve their own problems — and sometimes they do — but ultimately, they’d benefit from bringing in proper restructuring assistance to gain different perspectives on possible outcomes,” he says.

    “Often, with small to medium-sized unlisted companies, the directors’ own financial affairs are so committed to the company that they see little difference between it and their own personal position. That forces them to take greater risk. Unless they keep their business alive, they will probably go bankrupt because of guarantees they may have given to their creditors or bankers.”

    Parbery stresses that most Australian directors have not been close to a business failure and lack experience in workouts. However, he regards Virgin as a good example of restructuring. “We view directors of companies that have been through a business failure somewhat negatively,” he says. “But if Virgin comes out of administration and is restructured, I don’t think its directors will be harmed — and they may well be sought after. The directors acted early while they had considerable cash reserves, which has allowed them to have a chance of restructuring the airline.”

    So what else leads to a successful restructuring? “Ultimately, cash is king, says Parbery. “Nothing has changed. It’s all very well to look at the profit and loss account, but at the end of the day, you need to have good cashflow models for different outcomes.”

    Parbery emphasises that during these times, directors must ensure they address key pivotal points (see breakout, above).

    “If there is too much uncertainty about the future and no hope of raising capital to meet future holes in the cashflow, then directors should not expose themselves to possible personal liability by continuing to trade a business,” he says. “In simple terms, you should not be unduly risking the position of creditors by taking on the risks of trading unless your plans are actually likely to improve the position of those creditors.

    “Often, directors may have lost their own equity and are not objective enough in terms of what is in the best interests of the company,” he says. “They may be prone to taking unnecessary risks at the expense of creditors. This lack of objectivity can be checked through the safe harbour process and having a third party review the company’s plans.”

    Inside the ASX

    Analysis by board adviser Apollo Communications provides a rare insight into the composition, age, tenure, fees and education of the directors of ASX 100 listed companies. Worth a collective $1.7 trillion, these companies are overseen by 713 non-executive board positions. Some directors sit on multiple boards, meaning 563 individuals govern wealth creation for shareholders, employing up to three million people.


    The average tenure is five years and four months per board. Females spend four years and nine months; males spend five years and 11 months in each role. Ramsay Health Care’s Michael Siddle is Australia’s longest-serving board director at 45 years. Three other Ramsay directors also made the Top 10 list — Peter Evans MAICD (29 years), Kerry Roxburgh (22 years, four months) and Rod McGeoch AO AM FAICD (22 years, four months). The only female is JB Hi-Fi’s Beth Laughton FAICD (18 years, five months).


    Median age is 60, surpassing the median age of CEOs of 54. The oldest is Goodman Group’s Ian Ferrier (79); the youngest, TPG Telecom’s Shane Teoh (33). The median age for female directors is 57 compared to 62 for males.

    Gender gap

    63 per cent of directors are male and 37 per cent female, with 86 per cent of chairs male. Male directors earn 20 per cent on average more than their female colleagues ($263,144 vs $218,696). The gap narrows at chair level, male chairs earning 14.7 per cent more than female chairs on average ($502,516 vs $437,990).

    Best value

    Global biotech CSL, and gold miner Newcrest Mining provide the best value when board remuneration is ranked against market capitalisation. CSL is ranked second among the ASX 100, yet is ranked 52nd in terms of board fees paid ($1.69m). Newcrest Mining is ranked 16th in terms of market capitalisation, but is ranked 66th in terms of board fees paid. The next best-value boards are Magellan Fin Group, Coles Group, GPT Group, Afterpay Touch, Xero, Sydney Airport, a2 Milk Company and Sonic Healthcare.

    Best pay

    The best-paying boards in Australia are not necessarily the largest. They are BHP (third by market cap), Resmed (51st), Macquarie (seventh), Rio Tinto (12th) and NAB (fifth).

    Highest remuneration-to-market-cap ratio

    The 10 boards with the highest remuneration-to-market-cap are Virgin Money UK, AMP, Resmed, Bank of Queensland, Link Group, Star Entertainment Group, Worley Parsons, James Hardie, Soul Pattinson and Challenger.


    61% have an undergraduate degree, 26% have postgraduate qualifications, 7% have PhD or doctorate; 6% have no degree. 112 directors have an MBA. The University of Sydney has educated more ASX 100 board members than any other, followed by the University of Melbourne. UNSW has educated more senior CEOs.

    Overseas study

    40% completed their undergraduate degree overseas. 32% of these were from the US, 29.6% from the UK, 16.9% from NZ, 4.9% from Canada, 3.7% from India and 2.5% from China. Four degrees were completed at Chinese universities and one in Japan. Harvard University was the top for post-graduate qualifications (32 directors) followed by UNSW with 21.


    27% have formal accounting skills, 7% finance, 3% science and technology, 2% engineering.

    Arts or science?

    Bachelor of Arts is the most common degree for professional directors, whereas for CEOs it is a Bachelor of Science.


    The average ASX 100 board has seven directors.

    Professional affiliations

    The AICD is the top professional body of ASX directors with FAICD the most common postnominal, followed by Chartered Accountants (CA).

    Source: Apollo Communications ASX 100 Board of Directors Report 2020

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