By Lynn Greiner

Over the past decade, many LITs have found that traditional restructuring options such as negotiating with creditors and filing proposals or plans of compromise are increasingly no longer always viable. Instead, assets are being sold to generate liquidity and pay off debts.

“There is a thing that happened a few years ago called Covid that changed a lot of things,” noted Dominic Deslandes, CPA, LIT, partner, Raymond Chabot Grant Thornton. “Many businesses fell down, and others saw their sales increase a lot. During that period, a lot of value had been created for many companies. Many transactions also happened during that time, at high values, and these transactions have mostly been financed with debt. Optimism was really part of the game.”

However, he said, that optimism resulted in a lot of loans based on unrealistic numbers being provided to banks, and over the last 12 – 18 months, reality set in. He saw sales decreasing and the value of many of the debtor companies declining. This led banks to realize that a lot of the debt was based on assets that were not worth the value of the loans, although they remained patient, hoping the companies would return to profitability or that some other trend would make it possible for them to recover the loans. But over the last six months, he said, their patience ran out.

“And then secured creditors in some situations believed they may want to get out of some files. They didn't believe that they could wait longer, and feared that if they waited, they might be more at risk in six months than right now,” he explained. “In some cases, we see patience again and, in some others, secured creditors believe they are better off taking a loss now, normally through a supervised and robust sale process. They are ready to accept less money for the assets because they feel that in the future it may become riskier for them to wait rather than to sell the assets right now. I see that more and more.”

A noticeable shift

“The Covid-19 pandemic had a profound impact on the Canadian economy,” agreed Chelene Riendeau, CIRP, LIT, VP, MNP Ltd., “leading to increased corporate restructuring as businesses adapted to new market conditions. Companies have had to navigate supply chain disruptions, changes in consumer behavior, and shifts in global trade dynamics. Technology and automation have also played crucial roles. Businesses are increasingly adopting new technologies to improve efficiency and competitiveness. With these changes, there has been a noticeable shift towards selling assets as a quicker way to generate liquidity and pay off debts.”

And there are often fewer options now, said Jonathan Krieger, senior vice president and national restructuring leader, Grant Thornton Limited. “Societal shifts in consumer behaviour have intensified pressure on industries that were already vulnerable,” he observed. “These changes often leave very few short-term, workable solutions, thus requiring some companies to be liquidated vs. traditional restructuring options. Some businesses facing challenges are no longer dealing only with financial instability; they’re grappling with fundamental shifts in their business models and operations due to changing consumer preferences and market dynamics that will not self-correct, even with reduced debt.”

And that can make it difficult to save the organization. In fact, Krieger said, “in some cases, technology has rendered some businesses past their useful life and there is very little to restructure or sell.” And, Riendeau noted, although asset sales can be less complex, less expensive, and less time consuming than formal restructuring, “the decision between selling assets vs. negotiating with creditors and filing a proposal or plan of comprise depends on asset value and marketability, the financial health of the company, creditor cooperation, and market conditions.”

Valuing the assets

When that decision has been made, and an asset sale is in the offing, the LIT faces a whole new set of challenges. One major issue is valuing the assets for sale. “Accurately valuing distressed assets can be challenging, especially in volatile markets,” Riendeau said. “This can potentially lead to disagreements between buyers and sellers.”

Deslandes agreed. “The value of companies and assets were higher a year ago, a year and a half ago, two years ago. It has gone down now because of many factors, including uncertainty in the market. So, when we're doing a sales process for assets or companies, when we have an appraisal, most of the time, the appraisals are much higher than the prices we're getting.”

And, added Krieger, “The sale process has also become more strategic—rather than being a default solution, asset sales are considered within a broader context of operational improvement and long-term viability.”

Need a more holistic view

Money is, as always, another issue. Deslandes pointed out that banks have less appetite for financing the transactions at a higher price, which depresses the value of the assets. In addition, Riendeau noted, “Poor market conditions can make it difficult to find buyers willing to pay a fair price for the assets. This can prolong the sale process and reduce the recovery value.” If customer data is involved, she added, there’s the additional complexity of compliance with data privacy regulations on top of any legal and regulatory hurdles to be surmounted. These, she said, require “careful attention to detail to avoid potential liabilities.” And it’s also important, throughout the process, to maintain the seller’s reputation, she said, because “negative perceptions can affect the value of the assets and the willingness of potential buyers.”

All this has required adjustments to an LIT’s approach. “We’ve adapted by taking a more holistic view in restructuring mandates and often work more closely with our Transaction Advisory team to address fundamental operational challenges and identify novel solutions,” Krieger said.

Riendeau agreed. “Dealing with these obstacles requires a combination of strategic planning, effective communication, and adaptability,” she said. “Engaging experienced advisors early in the process to help identify issues and assist in achieving a successful restructuring plan and/or maximize realizations.”

“It’s important to stay updated on the latest industry trends, regulations, and best practices,” she added.

Sales process changing

Due to all of these factors, and others, the sales process itself is changing, and sometimes not in a good way, Deslandes noted. For the first time, he’s seeing no interest in assets from buyers, at any price.

“There's money out there, but people are more cautious when they're bidding. Also, when we start [the process], most of the time, there’s a lot of interest. They want to see what we have for sale. They are really, really interested,” he said. “But unfortunately, they look at the opportunity, and then they say, ‘That's not what we thought it would be. We're no longer interested.’ It's strange, because there was a lot of interest in the beginning, and then the more we get into the process, the less interest we get, and at the end of the day, in some processes, we didn't get an offer.”

This only happens in 10% - 20% of situations, he said, but it’s something new.

Riendeau, too, has seen changes in the sales process.

“There is a greater focus on conducting sales quickly to maximize value,” she said. “The increased use of technology has played a significant role in changing how we sell assets. The sale process has become more digital, with online data rooms, online auctions, and digital marketing. Advanced technology is also helping buyers conduct more thorough due diligence. “

A lot of uncertainty

She is cautiously optimistic for the future, she said, but a lot depends on market conditions.

“The success of asset sales is largely influenced by current market conditions. Favorable market conditions can lead to higher recovery values, while unfavorable conditions might necessitate more strategic sales approaches.”

The new U.S. government is making people nervous, Deslandes added. There’s a lot of uncertainty, but he believes things will settle down in a year or two. “It's a cycle,” he said. “It will come back to some kind of normality.”