European banks are now increasingly opting for US Charter 11-style consensual restructuring in bankruptcy cases. As a result the chief restructuring officer now occupies centre stage. Charles Bellringer, senior associate at AlixPartners discusses this phenomenon.
The globalisation of capital markets, the complexity of debt structure and the increasing presence of US financial institutions in Europe are all affecting trends in the European turnaround industry.
In turn, changes in European law are contributing to the number of consensual corporate restructurings and the emergence of a new role: the Chief Restructuring Officer (CRO).
A NEW APPROACH TO BANKRUPTCY
In many European countries, approaches to receivership and bankruptcy are being modified to allow for consensual out-of-court restructuring and reorganisation under the protection of bankruptcy.
Rather than the automatic move to liquidation, which only serves to destroy corporate value, this aligns the interests of all of the company's stakeholders to deliver the best possible outcome.
For example, in the UK the Enterprise Act 2002 introduced modifications to the laws of insolvency and streamlined the process of administration, permitting the holders of floating charges, the company or its directors to appoint an administrator.
The administrator has the objective of rescuing the company – or achieving a better result for creditors than they would through a winding up – and realising assets for secured or preferred creditors.
GROWING CONSENSUS
The increasing demand from US private equity firms for investment opportunities outside the US is fuelling the private equity markets in Europe.
In addition to the increased US investment in Europe, the number of US law firms, US banks and other financial entities with a presence there has risen dramatically over the last ten years, bringing with them specialist skills and experience acquired working with troubled companies.
Private equity investors are keen to drive value into their portfolio companies through a variety of measures, such as best practices in purchasing, operations and financial management.
When those companies get into trouble, private equity managers want to recover as much value as possible. Their increased presence in Europe and their obvious preference for restructuring has had a major impact on the development of consensual restructuring across Europe.
But perhaps the most significant development has been a general recognition of the advantages of consensual restructuring among European banks. They have now realised that they can gain fees or negotiate an equity interest as the price of consenting to a consensual approach where there is a good chance of preserving the enterprise.
In addition, the consumer trends of the last decade have not been lost on retail banks, and they have become increasingly concerned with protecting their brand image. As a result, they are looking to avoid the adverse publicity associated with involuntary liquidations and the resulting job losses and social distress.
Banks are keen to demonstrate that they have explored all reasonable options for preserving a distressed enterprise, albeit in many cases on a reduced scale.
CONSENSUAL RESTRUCTURING
A recent AlixPartners client in Germany is a case in point. Cable company ish GmbH was in considerable difficulties, overwhelmed with debt and almost out of cash.
Given Germany's strict and unforgiving insolvency laws, this scenario would typically have led to an immediate shutdown of operations, huge losses to lenders and vendors, and job losses that had a severe impact on the local community.
Thanks to swift consensus building, action to stop loss-making ventures and, most importantly, the continued support of the company's banks, ish stayed in business. The success of consensual restructuring was further underlined earlier in 2005 when Kabel Deutschland acquired the company.
In Italy, major bankruptcy legislation is also in the pipeline. The Italian Government, partly influenced by the Parmalat debacle, is pushing ahead with urgent reforms. Early detection is seen as critical, and there is a move towards out-of-court restructuring and bankruptcy procedures along the lines of the US's Chapter 11.
ENTER THE CRO
Another recent trend is the emergence of the CRO, a relatively new concept in Europe. The role was developed in the mid-1990s in direct response to the need for someone well versed in complex capital structures who could also manage all the stakeholders and bring the restructuring process to a conclusion in a timely manner.
In a restructuring, time is money, so stakeholder management is absolutely critical in ensuring that the process does not get bogged down.
The CRO must be adept at bringing together all parties and their different agendas under the common goal of creating the best solution for all stakeholders – be they the company and its employees, equity holders or debt holders.
This is often a complex and painstaking task, requiring diplomacy, resilience and calmness under pressure, as well as financial, operational and management expertise.
For example, at the Equitable Life Assurance Society (ELAS) in the UK, which was threatened with insolvency as a result of a House of Lords judgment, there were over one million irate policyholders to placate. The Financial Services Authority (FSA), whose role in the collapse was under investigation, subordinated debt holders, including vulture funds.
Also involved were a new board of directors working almost on a pro bono basis, a hostile media, a number of concerned financial counter-parties, and several members of parliament and government ministers. The government also commissioned an enquiry into the collapse, chaired by Lord Penrose.
The style, content and timing of each communication would have been a major challenge even without the financial crisis, and avoiding mistakes was critical. The task was greatly simplified by specialist crisis communication consultants and the exceptional communication skills of ELAS chairman Vanni Treves.
DELIVERING VALUE
A turnaround requires a CRO who knows what to say to whom and when. The CRO must understand the interests and motivations of each group and be adept at communicating and building consensus under extreme time pressures.
They must be able to balance the demands and egos of dozens of different people, and have the operational and financial experience to keep interested parties focused on the real issues and hold them to reasonable deadlines.
The CRO also shields the CEO, CFO and COO from the details of the reorganisation process, leaving them free to carry on with the day-to-day management of the company. Since a number of accounting and financial issues come with insolvency and turnarounds, senior management typically cannot handle the extra workload.
It may be useful to consider CROs' concerns regarding balance sheets and income statements. At the beginning of a restructuring, the CRO is focused on restructuring the balance sheet, but the company invariably falls flat as a result of unsatisfactory profitability and poor cash generation.
While banking advisers will provide solutions for restructuring the balance sheet, without an accompanying improvement in cash generation the crisis will simply repeat itself.
REBUILDING CONFIDENCE AND RECONCILING DIFFERENCES
The task of rebuilding stakeholder confidence and reconciling their different interests within an overall recovery plan must be handled with care. The credibility of senior management is often eroded by failure to achieve previous plans, but the CRO brings much-needed independence to the development of restructuring plans.
This independence – combined with efforts to ensure the plans have a good chance of success – can help rebuild confidence.
Often the solutions for improving cash generation are already known to middle management. The CRO has the difficult task of motivating these people to join the fight for survival.
Mobilising them and providing them with incentives can be a powerful weapon in the struggle – provided that the CRO has identified the strategies that need to be implemented.
Speed is one of the CRO's most important attributes, as they have to make an impact quickly. Time is always in short supply for a company that is in financial difficulties, but an experienced CRO can hit the ground running.
Indeed, they can do as much for the success of a corporate turnaround as an experienced CFO can in managing a finance department.
Given the weakened global economy, fierce global competition and rapid pace of technological change, it is clear that financial crises will continue to strike companies. Businesses in Europe must deal with this reality.
Distressed businesses do have a better chance of survival today than in the past, when creditors automatically pursued insolvency.
Taking full advantage of a consensual restructuring involves rapidly deploying expert resources to work with the CEO, CFO and COO, and bringing essential restructuring skills to bear. That is the value of having an experienced CRO.
