The following is reproduced from an interview of Mr Chio Kian Huat by DP Information Network Pte Ltd. The interview was published in the 3rd edition of the Singapore 1000 (Year 2001/2002) newstand edition.

The current economic downturn has affected most companies across all industries. While the impact to each individual company varies, for companies that have not fully recovered from the Asian financial crisis just a few years ago, the current economic recession would have an immense impact on them. For such companies, there is a great urgency to reinvent and rebuild themselves and in many instances, even to be subjected to business recovery measures.

Chio Lim Stone Forest is a leading provider of accounting, business advisory and recovery services in Singapore. In this interview, the Singapore 1000 team discussed with its CEO, Mr Chio Kian Huat, on various issues pertaining to helping companies to reinvent, rebuild and to recover (in short, referred to "corporate recovery" here)

Q. Mr Chio, thank you for your time to share with the Singapore 1000 team your views on corporate recovery. As a provider of such services, given the current difficult economic situation, is your company seeing more corporates facing financial difficulties? How would you define a company in financial difficulties? Do you look at any particular financial ratios or measures?

Yes, there are certainly more companies facing financial difficulties. Companies in financial difficulties can be broadly categorized into two main groups: those undergoing what we call 'growing pains' and those in real crisis situations. They differ in the following ways:

Companies Undergoing "Growing Pains"
These are companies that need to build up the necessary infrastructure to fuel their growth (e.g. to set up new offices and factories, recruit more talents, buy more machinery, increase their inventories etc). These expansionary infrastructure expenditure eats up their already inadequate capital quickly. It usually leaves them with inadequate working capital to support their day-to-day cashflow needs and their inability to secure new working capital because of their already high gearing (borrowings).

Companies In Financial Crisis
These are companies that are facing one or more of the following problems:

•	Experiencing recurring losses

•	Losing customers and business

•	Are unable to pay debts as and when they fall due

•	Creditors or bankers are taking legal actions to recover debts due from the companies

•	Collections are not sufficient to cover monthly basic expenditure, such as salary or rental

Financial Ratios / Measurement
Some of the financial ratios/measurement that we look at are:

•	Profit & Loss breakeven analysis: this will indicate how much sales are needed to cover operating costs.

•	Cashflow breakeven analysis: this shows how much cash needs to be collected to meet payments to suppliers, operating costs, interest and term loan repayments.

•	Liquidity Ratio - this will indicate the ability to pay liabilities due within a year

•	Gearing Ratio - this measures borrowings as a percentage of shareholders' funds

•	Number of times interest covered - this measures the profits as a multiple of the interest costs

Q. Usually, what are the causes of financial difficulties? Is it over-expansion or other reasons?

Going by our classification of companies into those undergoing 'growing pains' and those in financial crisis, the causes are as follows:

Companies undergoing "Growing Pains"

1.

Aggressive expansion by companies that is not backed by adequate capital and retained profits, and supported by an appropriate funding, is a common reason for companies that get themselves into a financial bind. For example, they use working capital lines to fund longer-term expansion plans that include investments in companies or fixed assets.

2.	Systems, including operating and management, are not adequate to support the fast growth and hence the companies face leakages in the form of revenues forgone, cost overruns and asset pilferage.

3.	Too much focus is put on increasing turnover and not enough on margins and profits.

4.	Too much focus is put on "killing" a competitor and not on building core strengths.

5.	Overbuilding of capacity that is not adequately utilised.

If these problems are not handled early and properly, they may lead the companies into financial crisis.

Companies in Financial Crisis
Companies that get into this situation normally would be those that:

1.	Make certain critical decisions that turn out to be against them

2.	Do not correct the problems that are faced by fast-growing companies (as discussed above)

3.	Face a sudden and drastic change in their competitive position which includes changes in technologies, entry of overly strong competitors and big shifts of cost competitiveness (like that being faced by companies in the region vis–à–vis China)

4.	Withdrawal of credit from a main supplier or bankers

5.	Failure or withdrawal of support of a major customer

Q. In your experience, is there any industry facing greater difficulty in particular?

Yes, the construction industry is particularly affected. The chief factor is the overall lower volume of work available. The industry is therefore highly competitive and contractors are under pressure to secure jobs with little, no or even negative margins, so that they are able to keep their cashflow rolling.

As the margins are poor, the number of contractors that fail increases. This leads to an overall more cautious and tight credit environment, leading to job delays and further failures. There is a knock-on effect to the sub-contractors and suppliers in the construction industry.

Q. How would a company facing financial difficulties go about seeking help? What are the alternatives?

The first thing to do is to establish whether it is experiencing 'growing pains' or is in a financial crisis. For a company that is facing not too severe "growing pains", it can consult its external accountants or business advisors for inputs to handle the "pains".

For situations that approach crisis proportions, it will do well to consult a specialist experienced in handling what is known as a "work-outs". This specialist will be one that is experienced in handling financial difficulties, including handling creditors and bankers.

The main point to note is that the earlier help is obtained, and the earlier action plans are executed, the better the chances of success in overcoming the problems.

Companies that are at least 30% owned by Singaporeans or Singapore permanent residents and meeting certain criteria may be able to obtain 50% to 70% subsidy, subject to certain maximum amounts, to help them defray such professional costs.

Q. Typically, what are the steps taken to help such companies? How do you decide whether a company or business is viable or not?

The first step that we normally take is to assess the financial position and the problems of the company. We then undertake a quick assessment of the business prospects of the company for the next year and where possible, the next few years. We would ordinarily help the management in getting the first cut of such information out within the first month. In some urgent situations, we may need to complete the first cut within the first week.

Having done the assessments, we then plan out the action plans that cover broadly, the immediate, the first quarter and the longer term. The immediate action plans ordinarily involve holding back creditors and bankers while our work is in progress. Immediate actions will also be taken to help the company stem all leakages to conserve cash outflow.

The first quarter's action plans cover two broad areas:

Drawing up and getting the company to approve our work plans and the likely courses of actions to help the company conserve cash outflows, and accelerate cash inflows; actions are also taken to increase the company's revenues, improve collections and clear stock.

Our longer term work centres around helping the company draw up an action plan to re-invent and re-build themselves or in situations where the prospects are dim, to help it go for an orderly cessation of its business.

A business is viable if there is still a market or potential for the company's products or services, and with proper management and/or injection of funds, the business could be revived. A company, on the other hand, is viable if the bankers and creditors do not withdraw their support and the business can still generate positive returns and cashflows.

However, there may be situations where a business can be viable and the company is not. This could be because the company had borrowed heavily to fund another but unsuccessful business venture and there is no way that the company can ever repay the liabilities. In this situation, we will try to save the business by hiving the business away from the company to be sold to another party.

There may also be situations where a company can be viable but the business may not be. This could be because the company has sufficient financial resources and/or other business units while the business unit concerned may not be viable. In such a situation, we may recommend disposing off or closing down this business unit.

There could also be situations where both the company and the business are not viable. In such situations, our main tasks will be minimise the damage to the company so that the creditors are able to obtain maximum payment for the amounts owing to them. This is achieved by ensuring that the realisation of the assets are done in an orderly manner so as to obtain the best values possible.

In happy situations where both the company and business are viable, the work will centre around working out the problems with the bankers, creditors and suppliers expeditiously. We would also like to help the company in their re-inventing and re-building efforts so that these can be longer-lasting.

Q. What is work-out / scheme of arrangement / judicial management? What are the differences?

Once we have assessed the viability of the business and the company, we will then decide the mode of our appointment under which we are to help the company.

Work-outs
A work-out is a systematic approach without any formal court sanctioned procedures to nurse a company back to financial health. The primary aim is to assist and where necessary, to provide temporary guidance to companies in financial difficulties.

Scheme of Arrangement (The "Scheme")

•

A Scheme of Arrangement refers to procedures under Section 210 of the Companies Act, Cap 50 to restructure the debts of a financially distressed company. The Scheme may involve rescheduling the payment of debts over a period of time, waiving part of the debts by the creditors or converting part of the debts to shares in the company.

•	For the Scheme to be binding on all the creditors, a majority in number representing 75% in value of those creditors present and voting at the creditors' meeting must agree to the Scheme. At the same time, the Court must also sanction the Scheme.

Judicial Management

•	This is a Court sanctioned protection sought by a financially distressed company to allow the company time to put forward a rescue plan. It is similar to Chapter 11 filing in the U.S. In granting a judicial management order ("JMO"), the Court must be satisfied that:

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The company is or will be unable to pay its debts.

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The making of the JMO would be likely to achieve one or more of the following:

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Saving the company or the whole or part of its undertaking as a going concern;

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Enabling a Scheme under Section 210 to be worked out;

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Effecting a more advantageous realisation of the company's assets than would be effected on a winding up.

•	The judicial managers are to put forward a statement of proposal on how to rehabilitate the company. The proposal must be approved by a majority in number and value of those creditors present and voting at the creditors' meeting.

A summary of the differences are as follows:

•

Work-outs

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Conducted without any formal court procedures

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No moratorium from legal actions

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The directors continue to run the company, with the supervision by the Steering Committee formed by the lenders (if there is one)

•	Scheme of Arrangement

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No moratorium from legal actions unless specifically sanctioned by the courts, on request

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The directors continue to run the company

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The Scheme needs to be approved by the requisite majority of the creditors (in number and value) and must be sanctioned by the Court.

•	Judicial Management

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Moratorium from legal actions once the company applies to the Court for judicial management order.

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Once the company is placed under judicial management, the directors lose their authorities to manage the affairs of the company. These authorities will now be vested with the judicial managers.

Q. If the company's business is no longer viable, what are the avenues available? Liquidation vs receivership?

Q. In your experience, what are the main difficulties in helping companies to recover?

From our experience, the key obstacles facing companies trying to recover are:

•	Management team's lack of will power to implement the necessary changes

•	The Company adopting a wait-and-see attitude

•	Conflicts in management team

Q. After assisting these companies to recover & restructure, do you continue to monitor their financial performance? Generally, on what basis would you consider a company to have been successfully restructured? Have you ever come across any unsuccessfully restructured company? What would be the solution?

Continual monitoring of financial performances is crucial for all companies, including healthy companies. For companies that we assist, we will help establish for them key performance indicators and a tracking mechanism as part of their reporting system. They will then have to maintain the system and use the information to enable them to better manage their companies.

In our opinion, a company would have been successfully restructured when it is able to achieve turnaround in terms of profitability and cashflow.

Companies which are unsuccessful in their restructuring efforts fail because of the factors explained earlier - lack of will-power, lack of sense of urgency, and conflicts within its management. Solutions in such cases include selling out to other parties or to cease their businesses in an orderly manner.

Q. Any final advice you would give to corporates that are facing financial difficulties?

More often than not, half the battle to overcome any form of difficulties is won when there is a strong will backed by the ability to diagnose the problems in an objective and systematic manner. In addition, most of our financial institutions are sympathetic to the problems faced by our businesses and are willing to help realistic, genuine and deserving companies work out their difficulties. To improve the ability to overcome the financial difficulties, it is best to seek help straight away and work with the bankers in an open and constructive manner.