Corporate turnaround, Restructuring & Insolvency
Managing adverse announcements
If not well managed, an adverse announcement such as a profit downgrade or debt covenant breach can unnecessarily wipe out significant shareholder value. It isn’t just investors who are impacted. Bankers, suppliers and customers can get nervous very quickly if the message isn’t managed properly.
Establishing whether an issue should be disclosed
Whether an issue should be disclosed to the market will mainly be determined by interpreting ASX Listing Rule 3.1:
“Once an entity becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information”.
Your decision should consider:
- How the issue will look in hindsight. Assume a regulator query or investigation will occur in the future and you need to justify your actions.
- Engaging lawyers to assist. This has the added benefit of qualified privilege that may apply to material created in the course of the investigation.
- Ensure employees are fully aware of the insider trading provisions of the Corporations Act. Your “black out” provisions will likely deal with this but it is a very good time to make sure everyone is up to speed on them.
If you have to go to the market with an announcement, go once and go properly
Drip feeding bad news to the market will destroy your credibility. If your announcement is based on a new set of forecasts, then you need to:
- Quantify the range of financial impacts of the problems and reforecast near term results.
- Consider the impact on cash flow and banking covenants.
- Allow a margin for error in the re-forecast results.
- Make sure your financial model is working as you think it is. Now is not the time for mistakes!
Consider engaging specialist accountants to assist in this process to provide independence and added skilled resources as finance and executive personnel will be stretched during this period.
Key messages to be communicated
While there may be many issues to address in a downgrade, there are some simple messages that must be conveyed to the market:
- Describe the problem, its cause and the potential impact on results.
- Explain the action taken to address the problem and avoid a re-occurrence.
- Confirm that the company has sufficient cash available to continue operations and has the support of its financiers. If you can’t confirm this then you have a bigger problem and should probably be calling a trading halt whilst you negotiate with your bankers.
Ultimately, when the downgraded result is achieved, remind the market that you delivered on your revised guidance.
Anticipate how the announcement will impact other stakeholders
Before announcing a downgrade, consider the impact on wider stakeholder groups, beyond just investors. A coordinated program of direct communication to key stakeholders must be ready immediately following the announcement to the ASX:
- Financiers will need to quickly understand the impact on covenants, both present and projected, cash flow and the ability of the company to meet debt service obligations.
- If you can’t explain this to their satisfaction, you may find yourself with an investigative accountant appointed by your bank.
- Major customers may be concerned that the organisation is financially weakened creating potential risk to the customers’ supply chain.
- Key suppliers and trade finance insurers may reduce trade credit which increases cash funding requirements.
- Employee retention must be considered as employees could seek out more “stable’ or “competent” employers.
- Unions may consider entitlements and security to be at risk and use this to agitate for more favourable outcomes in bargaining with the company.
- If the company is negotiating for the payment of a major receivable, the news may have major implications for the company’s ability to negotiate properly.
Who should lead communications of the downgrade?
While investor relations staff may support or co-ordinate the process, the CEO and CFO must front the communication. In our experience, CEOs and CFOs who hide in the shadows at critical times like this are on borrowed time.
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