A company can keep operating, generate cash flow, and meet its payments, while at the same time showing signs that its financial structure needs a review. Waiting for the first default can reduce the room to negotiate with creditors and adapt debt to the business’s real capacity.
The Abencys Restructuring firm places among these alerts the sustained deterioration of sales or margins, recurring deviations from the business plan, insufficient cash generation to meet expected maturities, and the growing use of financing.
The signals to analyze before a default
A persistent decline in sales or margins and recurring deviations from the business plan may indicate that the forecasts underlying the financing no longer reflect reality. To gauge their scope, it is necessary to compare the cash generated by the activity with the planned payment commitments.
The use of financing provides other alerts. Abencys highlights the higher average use of credit lines and the repeated need to roll over import financing. These indicators should be analyzed alongside the evolution of the treasury and maturities to assess whether they reflect a one-off situation or a persistent misalignment.
The assessment should also incorporate market evolution. Sustained price declines, structural cost increases, regulatory changes or changes in financing terms can alter the forecasts on which the debt was built. Consequently, a company that is operationally viable may need to revisit its financial structure.
None of these signals on their own imply that a company is insolvent or needs a restructuring. Their significance grows when they occur together, recur, or show a sustained trend.
Anticipating expands the range of options
The analysis should not stop at checking whether the company can meet the next due date. It should determine whether it will be able to service all of its obligations without compromising its activity and by connecting cash flow, debt, and business prospects.
In this monitoring, Abencys highlights the role of the Chief Restructuring Officer (CRO) as a professional capable of reconciling the financial and operational evolution with the business plan and identifying deviations that could threaten future capacity to pay.
The Consolidated Text of the Insolvency Law contemplates the possibility of initiating negotiations to reach a restructuring plan when there is a probability of insolvency. This situation occurs when it is objectively foreseeable that, without a restructuring, the debtor will not be able to regularly meet obligations due in the next two years.
“The mistake is waiting for the first default to ask whether there is a problem. A company can keep its operations going and remain viable, but have a financial structure that no longer aligns with its future cash-generation capacity. The sooner that misalignment is identified, the greater the room to analyze alternatives and preserve the value of the business,” says Enrique Calabuig, a partner at Abencys.
