It looks like a recession is coming after all. With all the government support measures during the corona crisis, we thought we could escape it. However, nothing can be predicted in advance. As it turns out, turning off the gas tap from Russia caused rising energy prices, which in turn led to an increase in prices of all kinds of other products, and before we knew it, we suddenly had one of the highest inflation rates in Europe in the Netherlands.
Labour costs went up due to the shortage of staff even before the energy crisis (because we can call it that). As did purchase prices for raw materials and materials due to exorbitantly increased transport costs from Asia. Inflation will only add to these price increases.
To do something about inflation at the macroeconomic level, one lets interest rates rise, at least that should be one of the remedies against inflation. However, at the microeconomic level, raising interest rates will have significant adverse effects on business, especially in the short term. A company seeking to have its working capital (re)financed through a bank loan will, as a result, immediately face significantly higher interest costs than had been anticipated beforehand. And on which the business case was built.
On top of that, in recent years banks have been under tighter supervision by the Dutch Central Bank and apply much tougher credit acceptance criteria than before. Our clients we speak to about this complain bitterly about all the questions the banks keep asking and conditions that must be met before the requested working capital (or its extension) is granted, if at all.
So the financing pressure is increasingly on shareholders. Professional shareholders (such as private equity) have experience of this. They sometimes work with convertible money loans, but often the initial payments are made as share capital (share premium). However, experience shows that even with professional shareholders, internal financing, by the holding company in which the operating companies are participated, is not optimally arranged.
In companies with professional shareholders, it is not rare that there is no bank financing. Thus, the shareholder has more or less taken over the role of the bank. In such a case, it is obvious that the financing shareholder, or at least the holding company that distributes the financing among the operating companies, should take the same position as a bank, with all the associated collateral that is usually also provided to a bank. Experience shows that this does not happen in many cases.
The same applies to less professional shareholders (such as in family businesses). How often does the family simply make a current account deposit to the company when money is needed and the bank no longer wants to finance it, with the idea that it will come back when things improve? And how often does it happen that that time is not going to come. Then, when the company goes bankrupt, the shareholder is left holding the bag. He has lost his company and can also write off his bridge loan. And if things get tough and the business premises are owned by mom or dad, and are so dated that it is difficult to rent it out externally, mum and dad also lose their pensions.
These examples are not isolated. DVDW is one of the leading law firms in the Netherlands in the field of insolvency and restructuring. Based on our experience with companies in trouble, we know what can go wrong and how to do it better. This is not to say that we can prevent a company from getting into trouble and, in the worst case, going bankrupt. However, based on our knowledge and experience, we can ensure that if such a situation arises, the interests of shareholders and/or external financiers are protected as much as possible.
In this magazine, we take a closer look at that. The articles range from theoretical to more practical in nature. We hope this will give readers a glimpse into the practice of our Enterprise & Finance (O&F) section, who we are and what we can do.
Once again, we have enjoyed writing it and hope for your reading pleasure!
This magazine is written in the Dutch language. Should you be interested in an English translation of one or more of the articles listed below, please do not hesitate to contact us.