Alternatives for industrial SMEs in front of difficulties that threaten their continuity – Second (and last) part – Potential solutions

In the previous chapter we have outlined an approach to the current situation that is presented to SMEs. I think it is convenient to say that it is complicated, we are not going to deny it, and that it affects to a greater or lesser extent all sectors of the industry. But as I always try to indicate in my articles, difficult or complicated does not mean impossible, in any way. They are situations that have to be known how to identify, a condition not sufficient, but totally necessary. Once a good general and particular diagnosis of each situation has been made, we have the right lever to start making decisions. Let’s go with it.

In front of this situation, the managers of industrial SMEs face complicated and very critical months in some cases in which depending on the decisions taken, the future of their companies will be substantiated. However, shedding light on this issue, there are several ways in Spanish legislation by which SMEs can face temporary situations of difficulty, in addition to the before-mentioned instruments (TLSs or RERs). I am referring fundamentally to measures that are perhaps more overwhelming but that, when well carried out, can be even more effective than the previous ones. They are the refinancing, the pre-chapter 11, the transfer of the productive unit or the advance agreement. Let’s see them in more detail:

  1. Refinancing: this is always on the table, and can be done at any time. Another different thing is that the creditors buy the idea. To do this, in my opinion, it should only be done when there is a business viability plan that allows estimating income and expenses that confirms sufficient liquidity to meet the commitments of the process. Otherwise, it will be a wasteful process, with a known result or that will force the company to accept conditions that are very difficult to fulfil and frustrating.

  2. Transfer of the production unit: for this it is a sine qua non condition that the company has a reasonable viability plan. In this case, the business activity can be maintained through the transfer of the productive unit even when an agreement with the creditors has not been approved.

  3. Pre-Chapter 11: gives creditors a period to negotiate a pre-insolvency scenario in order to facilitate reaching agreements.

  4. Advance agreement: it can be activated when the company cannot reach an agreement with all the creditors of refinancing or restructuring. This allows the majority shareholders to be presented with an agreement proposal so that the terms approved by the majority are extended to the rest of the creditors.

In the event that the company goes through particularly complex moments, experts consider that it is essential to have a Restructuring Plan. This means that the company can anticipate the situation and there can be a comprehensive advice continued over time. It is always advisable to anticipate situations, but even more in this case, where preventive actions can be carried out to help react in time to adverse situations.

There is a last way, to which the company can turn in case of need, the more the greater it is. I mean the auction of goods. There are two situations to differentiate:

  1. That the company is not in chapter eleven: in this case, a company can auction part of its assets for different reasons, be it divestment, relocation or sale of stocks that do not have outlets through the normal circuits.

  2. That the company is in chapter eleven: in this case, the project enters 100% of the liquidation phase. The chapter 11 administrator, through the Liquidation Plan, which is the roadmap, can propose to carry it out through auctions. Logically it must be ratified by the judge. It is true that in Spain, most chapter eleven procedures end in company closure. But regarding this it is important to point out several things:

    1. According to the Vice President of the ASPAC-Professional Association of Chapter Eleven Administrators, Unai Olabarrieta, 90% of creditors’ Chapter Elevens are from small and medium-enterprises, and 40% come with negative equity. In other words, the equity of the partners has been consumed, and all the risk is being transferred to the creditors.

    2. If we analyse this data, this indicates that companies are late for Chapter Eleven procedures and in these circumstances, the Chapter Eleven Administrator can only certify the closure of the same, check if there are assets, and pay as far as possible. SMEs, in many cases, are family businesses and their owners are more focused on using chapter eleven so as not to lose the company than as a means to save it. And when they realize that they must enter said chapter eleven to avoid the latter, it is too late.

    3. In this sense, the moratorium that came out in November, according to which the Government temporarily suspended the obligation to file a chapter eleven that all companies have, at the latest, two months after learning that they are insolvent, is a mistake, because it delves into the problem that has been indicated in the previous point.

    4. However, the law allows it to be done earlier, not waiting until there is no other option. In other words, using the Chapter Eleven Administrators as experts in dealing with very complex issues and not simply as liquidators.

    5. All this carries a basic conceptual problem, and it is to believe that the chapter eleven is to save the companies, when in reality it is to guarantee that the creditors collect, and so that their risk does not grow to the potential default. If in addition, the company subsists, much better.

Therefore, the Chapter eleven must be used as an element that, in case of not being able to keep the company as it is, it allows the company to liquidate parts of its business and even, as we have said before, transmit the productive unit.

As a culmination to this series of two articles, it should be said that industrial SMEs must adjust their cost structure, given that this crisis is taking longer than we initially expected in March 2020. Therefore, it is necessary to put into practices an overwhelming policy, not just cosmetic, of responsibility in internal management.

In short, they should not be constantly waiting for government aids, because they will end. They should focus on liquidity, try to renegotiate their debts, save costs, and of course, something that is so fashionable, but that we haven’t finished executing, to digitize.