IAIN MacRITCHIE TOO many companies are walking blindly into failure by carrying debt levels too difficult to repay. There are some that will never be able to generate the increasing levels of profits they need to service their debts. Business plans almost always assume sustained profit growth.

If you combine shortfalls relative to ambitious projections, with small movements in interest rates (taking account of the recent interest rate rise to a five-year high of 5.25%), you get immediate pressure on cashflow. To help a company recover will now need more than a quick visit to the doctor.

The record levels of corporate debt reached £131bn of leveraged loans issued in Europe last year and there is little sign of a squeeze. The volume of deals in 2006 was up 41% on 2005.

A recent Financial Services Authority (FSA) report revealed the average leveraged loan in 2006 was 6.41 times a company's earnings before interest, tax, depreciation and amortisation. Subsequently, the FSA fears a collapse of a big private equity-backed company is "inevitable". Indeed, the number of UK businesses going bust jumped by 11% in 2006, according to Experian.

Despite these figures, few foresee a sharp correction unless significant political or worldwide events hit confidence. Debt now comes with increasingly flexible structures and covenant headroom. The problems will start when the cash runs out.

The debt market is awash with funding. There is an increased interest in debt trading and an emergence of interest in turnaround investing from hedge funds and other specialist investors. Banks (and other creditors) are more inclined to sell out rather than work through a turnaround situation. This can create further uncertainty for the company.

Constructively, there is more desire from shareholders to find solutions to minimise social and political costs instead of relying on insolvency processes.

This may add to timescales but it avoids the rather blunt instrument of a forced receivership. A "pre-packaged" insolvency, where a company is immediately sold on just after entering administration, provides an option to keep the company as intact as possible.

In any corporate recovery there are two distinct phases - first stabilising the business financially and then reviving its fortunes sufficiently to ensure longer-term health. The rescue phase lasts, on average, six months, but restoring health is normally at least a two-year task.

It is essential that any turnaround is not solely about the restructuring but about ensuring the ultimate survival of the company.

The objective should be to get through the difficult, rescue phase - stop the cash haemorrhaging and create a stable platform - and then to ensure the revival of the company through active leadership engagement, implementing lasting performance and profit improvement.

In a sustainable recovery, management teams need to be realistic and focus not only on profitability but also on customer satisfaction. Anyone taking on the leadership role should ensure teams work effectively to provide the best products and services on a consistent basis. Customer confidence is imperative and key to a company's profit, which in turn helps pay off corporate debt. Therefore, a motivated and customer-focussed attitude is essential.

In financially stressed situations, the distractions of financial restructuring negotiations are significant. It should never be under-estimated how much they impact the business, management and ultimately the performance, as well as draining cash resources in fees.

A deliverable recovery plan should dictate the financial restructuring and ability to service the company debt. There should also be a contingency plan. It is about aiming for above-plan performance but having the actions pre-planned if the results drop below that.

There is a constant need for change to remain competitive and overcome market pressures. You need the flexibility to adapt. It is common sense.

We were involved in a 185-year-old UK engineering business which had become heavily loss-making and whose future was in doubt. Two failed acquisitions had drained the company and increased its debts to an unsustainable £25m. With eight subsidiaries and international operations, the challenge was significant. After the initial intensive care period and three years of performance improvement, the bank debts were repaid in full, shareholders made a healthy return, and an initial loss of £3.8m was turned into a profit of £3m.

High levels of corporate debt and the resultant pressure on performance to meet the increasing profit and cashflow requirements will inevitably result in loss. However, by giving the business enough time to deal with the issues, the negative impacts can be minimised and a sustainable future rebuilt. Iain MacRitchie is chief executive of MCR Holdings