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When Dealing With Debt, Confidence Is King


Credit rationing means there is, and will continue to be, a race to access funds. While market confidence remains fragile, a company’s ability to communicate how it is addressing the threats and opportunities created by the current climate has never been more important.


W

hile credit is an absolute phenomenon in the sense that there is only a certain amount of it available at any one time, we should not underestimate the significance of confidence in credit markets. Lenders require two elements – both the money itself and the confidence to lend it to someone. Highly leveraged firms are facing a difficult confluence of negative supply-and-demand dynamics, where there is increased demand for capital from struggling borrowers at a time when credit is tighter, and lenders are being much more selective about who is able to borrow.

Recent research undertaken by FD, the strategic communications segment of FTI Consulting, gives an insight into global confidence levels. In a survey of 153 institutional investors from more than 15 countries, 64% of respondents said that they did not believe the financial crisis was over. Only 31% thought that it was, with 5% undecided. As the chart shows, UK, U.S. and Australian investors were the most pessimistic. Continental European and Asian investors were slightly more optimistic. It’s worth noting that the interviewees, who between them have more than $2.8 trillion of equity funds under management, cited the amount of leverage that remains in the system as a major concern.

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A heavy debt burden and floundering confidence creates a huge gulf between companies which need refinancing and those that are able to stand alone. Well-capitalized companies have an opportunity to differentiate themselves by emphasizing their financial strengths and self-financing capability. They are in a strong position in the M&A market and should look at ways to communicate how the current environment will present opportunities for them.

Weaker companies are in a completely different situation, but effective communications are no less important. Financial markets fear uncertainty even more than difficult circumstances, especially when visibility is low and confidence is fragile. Key here is how management teams proactively communicate actions intended to improve operating performance and cash flow at the company. Ultimately, the challenges and travails of publicly traded companies are open to the world so credibility is best retained by acknowledging and addressing the challenges head on. By doing so, one is providing a degree of visibility into one’s problems and helping to mitigate the fear factor for creditors, partners and investors.

Where possible, public companies should try to use their normal ongoing investor events, such as earnings announcements, to articulate how they are contending with credit-related matters. The emphasis is to communicate to both the debt and equity communities in a unified fashion rather than in parallel, which is less alarming to the market than stand-alone announcements regarding financing. Furthermore, as debt maturity approaches, there will be a number of parties involved in the refinancing negotiations, with an accompanying increase in risk of leaks from parties that have differing interests.

It is important to have ongoing control of one’s story in advance of that, rather than being put in a position of having to respond defensively to adverse leaks or disclosures by others. In addition, this may warrant concerted and heightened communications to the debt community, and one will want as much as possible to maintain credibility and stay in their good books in order to tap their capital.

As debt issues intensify, it becomes more important to ensure that all communications with stakeholders are managed effectively, and with nuance. This is not easy. There is a fine line one treads between being transparent and causing alarm – get it wrong, and the loss of confidence this creates could become a vortex that destroys the business.

Finally, it’s important to remember that good communications can only serve an organization that is doing the right things. Companies cannot use communications to paper over bad strategy and execution, nor bail out a flawed business.

Gordon McCoun is Vice Chairman, FD, the strategic communications segment of FTI Consulting.

Published October 2009

© Copyright 2009. The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.

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Strategic Communications
With more than 25 years of experience advising management teams in critical situations, the Strategic Communications practice of FTI Consulting has a broad network of relationships with key influencers, and provides communications counsel based on in-depth industry knowledge and experience.
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