1: Avoid Bankruptcy — But Not at All Costs
There’s no doubt that bankruptcy can be a long, hard slog. Solutia, the $3.8 billion chemical-business spin-off of Monsanto, spent four years, two months, and 11 days in Chapter 11 before exiting last February. Although the company grew revenues 34 percent while under court supervision, CFO James Sullivan had to file five amendments to the plan of reorganization as creditor committees battled for a bigger piece of the growing recovery. “It was especially frustrating for me,” Sullivan says. “I thought the company was ready to come out in 2006. Then the credit markets collapsed in front of us.” Solutia had to sue its exit financiers to complete its $2.1 billion emergence financing.
Knowing that, companies often do anything to avoid bankruptcy, but beware of taking extreme actions too late in the game. The time to perform business and operational adjustments is at the first sign of trouble, not when a default occurs, says Lenhart. During high-growth years, inefficiencies creep into processes that can be quickly identified to pare costs, Lenhart says. What is it really costing the company to deliver products and services, and what are customers paying for them? “You can always do something to reduce costs,” echoes Charles F. Kuoni III of CRG Partners Group LLC, a turnaround management firm. “Making that an everyday job is how you stay out of trouble.”
At the same time, should debt-covenant defaults and excessive delinquencies on payables be present, the CFO should make every effort to avoid creating adversarial positions for key stakeholders. The CFO has to seek support by sharing information in good faith with senior lenders and critical creditors, says Dinoff. The frequency of financial reporting has to rise exponentially. “You don’t want the decision to file bankruptcy to be taken from you,” Dinoff says.
Still, the CFO has to know at what point it makes sense to capitulate and live to fight another day under Chapter 11. Many executives desperate to avoid bankruptcy wind up hollowing out the business by collateralizing all the assets or selling the company’s best assets to raise cash and extend the runway, says Buckfire. One common result: companies without assignable collateral wind up paying exorbitant terms on debtor-in-possession financing. “It takes tremendous discipline to not liquidate and say, ‘We’ll work it out,’” Buckfire says.
2: Explore the “Prepack” Option
In a “prepackaged” bankruptcy, creditors, bondholders, and other constituents agree to support a plan of reorganization before the company files with the courts. Remy International Inc. was the third major U.S. auto supplier to file in 2007. It spent only 59 days in Chapter 11 (the average is about 16 months). But the debt-laden company had spent months prior talking to bondholders, says CFO Doug Laux. The filing allowed Remy to reduce its long-term debt by $360 million and then focus on its operational repair, Laux says.
Prepacks are most appropriate for a straight balance-sheet restructuring, when a company is, for the most part, operationally sound and current on trade agreements, says Jonathan Carson, president of Kurtzman Carson Consultants, a claims and noticing agent servicing corporate restructurers. Importantly, none of Remy’s creditors took a significant haircut in the recovery, Laux says, which made the process faster.