Long term creditors: converting liabilities to equity
Welcome to the fourth piece in our 'Building a resilient balance sheet for 2021' series looking at solutions and opportunities for 2021 viewed through the balance sheet. We now look at non-current liabilities.
What is a non-current liability?
A non-current liability is a financial obligation which is not expected to be paid within one year. Examples are:
- term loans;
- other committed banking facilities;
- loan notes and;
- long-term shareholder loans.
Converting liabilities to equity
As companies need to improve their net asset position either to secure additional funding, to strengthen their balance sheet, or even to improve their credit rating, it might be attractive to convert some long-term liabilities to equity.
If there is little prospect of the non-current liabilities being repaid in the short term, then strengthening the balance sheet by converting long term debt to a form of equity might better support the prospects of the business.
Different types of equity
There are many different types of equity, some of which are not too far removed from the debt that they have replaced. Preference shares, for example, can carry an annual coupon (interest payable) and can be redeemable at agreed times, or in agreed priority such as before ordinary shares on exit or winding up.
Changes to a company’s share capital such as the introduction of preference shares may require changes to the articles of association. Any such changes may require the approval of 75% of those shareholders who are eligible to vote. It may also require consents to be provided under a shareholders’ agreement if one exists. Legal and tax advice should always be taken as there can be unintended but costly consequences of not planning the structure correctly.
Long term creditors will not always be willing or able to convert their debt to equity. In our next post, we look at some ideas to engage with and manage longer-term creditors.
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Key things to ensure your balance sheet is fit for 2021
This webinar draws together the key learning points from our “How to prepare a resilient balance sheet for 2021” series. Our experts also offer additional insights and opinion on the series and answer questions that it has provoked.
10 Gateley insights for a resilient balance sheet
Follow our ten-part series looking at solutions and opportunities for 2021 viewed through the balance sheet.;
Introduction: How to prepare a resilient balance sheet for 2021
Article one: How to ensure the assets on your balance sheet are working for you
Article two: Current assets: separating the ‘can’t pay’ from the ‘won’t pay’ customer
Article three: Short term creditors: how to access funding
Article four: Long term creditors: converting liabilities to equity
Article five: Long term creditors: the benefits of informal creditor arrangements
Article six: Net Assets: what the new restructuring regime means for your business
Article seven: Net Assets: how 'pre-pack administrations' can save your business
Article eight: Net Assets: Advantages and pitfalls of buying insolvent businesses
Article nine: How to unlock capital from inefficient equity structures
Article ten: Shareholder funds: when can a company declare a dividend?
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