Understanding the Stages of Financial Distress

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Announcing a new tool for companies trying to navigate high leverage and financial distress!

A common issue today is that companies begin to address financial challenges too late, or that their strategy isn’t aligned with the degree of distress. Initial strategies are often a combination of HIDE: Hope the problem goes away, Ignore the problem, Deny there is a problem, and Enjoy the bliss of ignorance.

Obviously, HIDE isn’t a real business strategy. It’s the opposite of what the board should be doing and what is best for the company. But it’s very common. This early period is usually when companies can most easily take corrective and protective action to avoid further distress.

Odinbrook is releasing a new tool to help companies self-evaluate their financial condition and find a path forward. Understanding the stage of distress can help companies assess their risks and develop appropriate strategies.

The tool assesses four Stages of Distress, as described generally below:

1. Stress – the feeling is “Something is not quite right”
2. Early Distress – underperformance continues and other challenges appear
3. Distress – the feeling is “High Anxiety”
4. Deep Distress – extreme actions required to avert future deterioration or Bankruptcy

For each stage, the tool offers selected signs (such as debt trading levels) for users to compare with their specific company’s circumstances. Once the relevant stage is identified, the tool suggests common company actions, strategies, and key risks.

While every company is unique, this tool helps senior leadership teams, boards, and capital providers categorize the degree of distress and use common language to begin discussing appropriate strategies for fixing things. The tool is also helpful as a conversation starter. The tool won’t solve all problems on its own or replace restructuring professionals, but it can accelerate the conversation and actions to avoid further value erosion. I hope to refine the tool further based on market feedback and ultimately have it widely used to help more companies improve their financial condition.