Due to the constant changes and multiple challenges in today’s companies, they must think and know how to face them in the best way. This dynamic world could make that solid and giant organizations, look at financial problems from one day to another, so it is imperative for them to know how to deal with it, if they must pass through a particular economic crisis.
Today, one of the most important concepts for corporate finances is financial distress. This term is very related with what we mentioned above, because if some organization is having financial problems, it could be possible because it did not adequately take on the challenges of today’s markets. This concept must be understood in the clearest way for companies and investors, as it could say a lot about the health of a specific business.
In this article, we will talk about the importance of this concept, and we will show some important organizations in which investors should be careful, due to the financial distress they have.
Also known as monetary distress, this concept refers to the condition that a particular organization has if it can not pay its debts or financial commitments. In other words, it is the condition that some business has when it can not assume its debts and creditors payments, which could take the company to bankruptcy.
When some organization is facing economic issues, one of the possible solutions is to make a loan with some financial institution, so the company can deal with its problems and finance its insolvency. However, this alternative brings multiple payments commitments, so if creditors see that the company in troubles can not assume them, this alternative will not be viable, which means that this organization could be having a financial distress.
As we mentioned, the financial distress is very related with bankruptcy. If a particular organization can not act responsibly with its debt and financial obligations, it is most likely that it suffers impoverishment, making that investor stay away from it, taking it to liquidation.
It is important to say, that the financial distress can be produced not only for payment debt agreements but also for operational troubles. That is to say, that organization can be having financial problems due to its elevated operational costs. Under these situations, companies must not think in a debt restructuration, but in an operational reorganization.
With the financial distress concept understood, then we can show some of the most important cases in today’s organizations, where creditors are keeping away, due to their economic or operational issues.
Petrobras – Petroleo Brasileiro
Founded in 1953, this Brazilian giant corporation was once the most important organization in Brazil, and one of the most significant companies in South America. For the last year, Petrobras had incomes for more than $150 billion dollars, employing more than 80.000 workers worldwide.
Currently, this enormous Brazilian company is suffering financial distress, due to the falls in oil and other products prices. In addition, Petrobras is having economic and debt payment problems, because of the depreciating currencies, making it unable to respond for its financial commitments.
For 2015, Petrobras had debt commitments for more than $130 billion dollars. To deal with this situation, the organization cut some investment projects and made multiple operational restructurations to reduce costs in more than $400 million dollars per year.
This high tech organization was considered one of the most innovative ones in the last years, for its 3D printers, but in the last year, the company has suffered huge falls in its sells. In 2015, this company reached incomes for more than $640 million dollars, almost 58% less than 2014.
Currently, this business has about $150 million dollars per year to pay its creditors, which is a critical number, knowing that its debts are increasing year by year. To deal with this situation, 3D Systems is making some operational modifications, to meet its monetary commitments. Moreover, it is making some investments in research and development for the creation of new solutions.
The U.S. Steel
Considered one of the most important and significant organizations in the United States, this giant has had some financial issues for the last years. Since 2012, the U.S. Steel has applied for credits to different monetary institutions, to deal with its obligations. Currently, this historical corporation has debts for more than $3 billion dollars and earnings before interest, taxes, depreciation, and amortization (EBITDA) for almost $841 million dollars per year, which shows a huge gap between its financial commitments and incomes.
Presently, the U.S. Steel company is responding to its financial agreements, but they are thinking in a debt restructuration, due to the big gap they have between incomes and their credits obligations. Besides, the organization is redesigning its commercial and production strategy to increase its sells not only in North America but in the world.
Related: Chapter 11 Bankruptcy – Common Terms by Suzzanne Uhland