Mastering the Turnaround

What it really takes to survive a corporate bankruptcy.

The caveat is that prepacks can cause issues with valuation. Because the operational restructuring comes after the reorganization agreement, the bankrupt entity’s valuation will be partly based on actions that haven’t yet been taken, Lenhart says. And that risk lowers the company’s valuation, giving creditors that are swapping debt for equity, for example, a larger share in the business.

3: Fix the Business

While in the weeks prior to filing Chapter 11 a smart CFO focuses on the analytical work of restructuring, once a company files, experts say, the priority has to be fixing the business. “The CFO has to immediately start paring costs” to preserve cash flow, says Kuoni of CRG Partners, who has stepped into CFO roles in crisis situations. “I’ve been in situations where we had large equipment leases and on the first day of filing rejected them and sent the equipment back to the owner,” he says.

The cash-flow forecast “operates in real time” and becomes a critical tool in this period, KCP’s Dinoff says. “You have to know how much time is left before the company is completely out of funds. You want to get from that crisis stage to stabilization quickly.”

While steering New York–based St. Vincent’s Catholic Medical Center through Chapter 11 in 2005, CFO Martin McGahan fought immediately to preserve liquidity and cool a $10 million per month cash burn at the 600-physician hospital. “We had a shrinking number of beds as well as revenue and collection problems,” says McGahan, a managing director at turnaround advisory Alvarez & Marsal. McGahan evaluated the location of the large, critical receivables; determined the priority of payables; and sought to minimize spending in other areas, such as the hiring of consultants. “As you track cash, it exposes a lot of the broken processes inherent in the system that leads to a real tactical response,” McGahan says.

Within a little more than a month of Sullivan’s coming on board at Solutia, the company had instituted price increases on some of the plastics it manufactures, closed its acrylic-fibers business, and formed a team to build market share in the Far East. “We needed to demonstrate to financial institutions that we could stop the bleeding,” Sullivan says. Long term, while still in Chapter 11, the company was able to invest cash into opening a new plant in China to build Saflex, a special type of protective glass.

Similarly, Dana Corp. focused on “a massive rehabilitation of its business-cash flows and income statements and not just a balance-sheet fix,” says attorney Corinne Ball, leader of the bankruptcy practice at Jones Day, which advised the auto-parts maker. The changes played no small part in Dana’s attracting a $790 million preferred-equity investment led by Centerbridge Capital Partners and a $2.1 billion debt financing to exit Chapter 11.

4: Talk It Out

When a company is in bankruptcy it is natural for employees — and the company as a whole — to lower their heads and cease communicating. But the opposite is required. Within days, if not on the first day, management has to set up cross-functional communications to break down the silos, says McGahan. “Operations has to know who to call in finance if there are no supplies on the shelf, and marketing has to know the strategy from the finance and operational perspective,” he says. Employees “need to have operating guidelines. They can’t sit in crisis mode for 90 days,” Dinoff says.


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