DSCR - Molto più di un indicatore - Pt. 4

DSCR - Much more than an indicator - Pt. 4

Let's now look at DSCR from another angle.

As anticipated in the third part of this contribution, the original art. 13 of the Crisis Code has been completely rewritten, it no longer speaks of crisis indicators and indices but of the institution of the national telematic platform for the negotiated composition for the solution of the business crisis.

This platform provides the entrepreneur with the tool of the so-called practical test for the self-assessment of the state of crisis , aimed at verifying the reasonable feasibility of the recovery, a test whose formulation actually constitutes a sort of different reading of the DSCR, and more precisely:

If you look closely, the practical test is a sort of "reciprocal" of the DSCR, since the numerator and denominator (formally different, but very similar in terms of the logic of composition and interpretation of the results) are presented in the inverted order with respect to this indicator, as we have seen in previous contributions.

Returning to our practical test, its compilation when submitting the request for access to negotiated settlement is optional, however it is recommended as it serves to provide an initial representation of the degree of difficulty in which the company finds itself and, in particular, allows a preliminary assessment in relation to the state of crisis or insolvency of the company itself.

The assessment of whether or not the restructuring is feasible is numerically summarised by the "ratio between the amount of debt that must be restructured and the amount of free financial flows that can be used annually to service it", a ratio in which:

in the NUMERATOR (debt to be restructured) we will have:

  • (+) overdue debt (with separate indication of the portion registered in the tax roll);
  • (+) debt rescheduled or subject to moratoria;
  • (+) used bank credit lines for which renewal is not expected;
  • (+) mortgage and financing installments due in the next two years;
  • (+) investments (Capex) relating to industrial initiatives that are intended to be adopted;
  • (–) expected cash flows from the disposal of assets or business units compatible with industrial needs;
  • (–) new contributions and financing, including deferred ones, expected;
  • (–) estimate of any negative Net Operating Margin in the first year, including non-recurring items;

in the DENOMINATOR (annual free financial flows to service the debt) we will have:

  • (+) Normalized Gross Operating Margin (MOL), before non-recurring items;
  • (–) annual maintenance investments (Capex) at full capacity;
  • (–) the income taxes that will have to be paid.

This process is in a certain sense “simplified”, as it does not require the prior preparation of a financial plan: the FCFO operating cash flow is in fact approximated through the use of the normalized annual prospective EBITDA, before non-recurring components, on a rolling basis.

If the company presents, starting at least from the 2nd year, annual flows higher than zero and destined to replicate over time, it will be considered to be in economic equilibrium from a prospective point of view.

At that point, the degree of difficulty of the restructuring will be determined based on the ratio between the debt that must be restructured (NUMERATOR of the test) and the annual amount of annual cash flows to service the debt (DENOMINATOR of the test).

The result of the ratio thus calculated returns a number that allows us to have a first rough indication in relation to:

  • the number of years needed to repay the outstanding debt;
  • the amount of debt that will have to be restructured;
  • the amount of any debt write-offs and/or conversions into equity .

Here is an example of what the practice test might look like:

On the one hand, the Numerator gives us the amount and detail of the debt exposures that require restructuring, in the example equal to 450,000 euros.

On the other hand, in the Denominator, the financial flows to service the debt that the company's management is on average able to generate at full capacity are equal to 200,000 euros.

The test will therefore lead to the following result:

The result of 2.25 can be read as a "number of years" necessary to extinguish the debt position, with a reading similar to that of the more famous PFN/EBITDA , the indicator most used by banks to estimate the repayment capacity of a company and which expresses the number of years necessary for the company to extinguish its net financial debt through the cash flow generated by the characteristic management, represented approximately by an economic quantity that represents it with an acceptable level of approximation: the EBITDA.

This score must be compared with a scale of values ​​that summarises the possible recovery scenarios that may arise following the use of the practical test.

In our example, we will have:

The practical test for verifying the reasonable feasibility of the recovery was born with a precise objective and with clear assumptions: it is by definition a practical test and it wants to be "simple", even if aware of giving up some in-depth analysis, to be postponed only in the case in which the test returns worrying results (for example values ​​higher than 3).

Once again, despite the apparent disappearance of the DSCR from the discipline of corporate crisis, the centrality of economic-financial planning emerges as the best path to take in order to prevent the crisis itself: all the various declinations of the DSCR are in fact focused on the estimation and quantification of prospective financial flows , within the framework of a forward-looking approach that is now very dear to legislators and operators in the banking world.

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