Economic Affairs

Distressed SMEs need corporate rescue centres

They are 'hospitals' where small and medium-sized firms can seek help, and it is best to have them in place before a crisis hits

The number of distressed small and medium-sized companies (SMEs) is increasing as Singapore's economy restructures.

They are in a state of poor health, and, as is well known, if you are seriously sick, you cannot cure yourself through self-medication. You need help from the outside in terms of funding, operational turnaround or assistance in finding a "white knight" to ride in and rescue the company. If left to market forces during difficult times, even healthy companies are adversely affected. The marine and offshore engineering sector, where once strong companies such as Swiber, Swissco and Ezra can collapse, is a case in point.

One way of helping companies in such situations is for industry, trade associations and the Government to work in a concerted fashion to create dedicated "rescue centres" that would assist in devising plans to turn around their fortunes, and also put such plans into execution.

The Government could provide funding support for such centres in the initial years to provide awareness, training and staffing. The trade associations, meanwhile, could provide the domain knowledge and business connections.

WHEN THE GOING GETS TOUGH

Singapore dollar bonds worth $22 billion are callable or due to mature this year, exposing issuers and investors to refinancing risks as borrowing costs rise in the US, according to a Reuters report. Banks have grown wary of lending. It was also reported by another source that about 42,000 businesses closed down in Singapore during the first half of last year, compared with 49,000 during the entire 2015.

In addition, SMEs face many challenges apart from high costs . For instance, many businesses in the retail sector are fighting for survival due to Internet and technology disruption - with more consumers preferring to shop online. It is heartening to learn that the Government is encouraging SMEs to digitally transform, adopt and enable technology to create new business models. However, many distressed companies need to survive first before they can transform.

Corporate turnaround assistance should not be delayed in the hope that market conditions will take a turn for the better, such as an increase in oil prices in the case of the marine and offshore engineering sector. Hence, the involvement of the Government is important, rather than leaving matters to market forces.

During the Asian financial crisis in 1997, Japan, Indonesia and Malaysia set up national rescue centres to assist distressed sectors. However, I would argue that it is better to set up the rescue centres now before a major crisis hits Singapore's economy.


ST ILLUSTRATION: MANNY FRANCISCO

It is also not a question of allowing weak companies to go under because of the rationale that they do not deserve to be saved - although it should be noted that the intent of the rescue centres is not to save every distressed company.

Neither is it a case of letting the industry creatively destroy itself so that it can transform. In the event that the whole industry is crippled, there will not be enough players in the ecosystem to support or sustain any creative business models. In the context of Singapore, the industry simply moves out if it cannot turn around.

Thus, the crux of the matter is saving a whole industry or ecosystem - of which SMEs are a very important component - and helping to tide them over so that they can survive to transform.

Here are three strategies for corporate turnaround or rescue.

1. EARLY DIAGNOSIS IS IMPORTANT

Today, many SMEs are not coping well, as they have obsolete and weak business models. They are the middleman as traders, distributors, stockists and agencies.

With the advent of the Internet, it is easy for buyers to find sellers, bypassing the middleman. Also, agency products have territorial restrictions which forbid SMEs from selling offshore. Thus, their growth opportunities are limited.

However, it is not suggested that SMEs immediately get out of the role of a middleman. But they need to quickly find new niches and transform their existing business models. The rescue centres, with their team of experienced specialists, will be able to guide companies on business model innovation and assist in transformation.

The key to successful corporate turnaround is early intervention. However, SMEs shy away from seeking help early. They also do not know where to turn to for assistance in a corporate turnaround. The rescue centres will be the de-facto corporate hospitals where they can get help.

2. BUYING FUNDS - AND TIME

Traditional lending agencies such as banks and venture capitalists tend to be more averse to lending during difficult times, just when beleaguered companies need an injection of cash to stay afloat.

The only feasible option is to merge and collaborate to share and optimise resources arising from excess capacity.

Unfortunately, studies have found the success rate of mergers and acquisitions (M&As) to be low as measured by increasing shareholder value. A key reason is that most of these companies often focus on pre-merger issues, such as strategic, financial and legal fit, and neglect post-merger integration issues, such as cultural, technical and operational fit. There is a need for effective execution of post-merger integration.

The proposed rescue centres can provide help in the form of independent post-merger integration and turnaround consultants. Such trained specialists will be more objective and can help improve the success rate of M&As. Also, such centres can help find suitable purchasers of companies planning to sell out, as the latter do not actively seek them out for fear that the market will know that they are in trouble.

The Government has enacted key debt-restructuring law reforms which allow more time and flexibility for distressed companies to restructure debt. This is most timely. However, if financing help is not forthcoming, once placed in judicial management or scheme of arrangement, there are few reported cases of distressed companies being rescued.

Corporate turnaround is not only about allowing more time for distressed companies to restructure their debts, but is also about getting the right people to do the rescue. This could involve finding the right white knight with the turnaround experience and finance, or the right turnaround specialists to get the company back on its feet.

3. 'DOCTORS' FOR CORPORATE RESCUE

As a nation, Singapore may not be able to cope with a protracted recession. The prolonged poor recovery of the marine and offshore engineering sector, as well as the retail sector, speaks volumes about the current ability to handle a dire situation, should it arise.

The concern is that there might not be enough turnaround managers should Singapore face a major, long drawn-out recession. At present, many managers may lack the experience of doing a turnaround, as they have experienced operating in only good economic situations. Also, few educational institutions teach the subject of corporate turnaround. The setting up of rescue centres can also spearhead training people in such expertise.

During bad times, professionals such as turnaround managers and consultants, forensic accountants, insolvency lawyers and debt-restructuring specialists will be much needed.

•The writer is chief executive of the Singapore Innovation and Productivity Institute, a subsidiary of the Singapore Manufacturing Federation, and author of Corporate Turnaround: Nursing A Sick Company Back To Health.

A version of this article appeared in the print edition of The Straits Times on June 14, 2017, with the headline 'Distressed SMEs need corporate rescue centres'. Print Edition | Subscribe