Looking for the Light

Guiding a company through a turnaround is no easy feat, but CFOs who can do it are in high demand.

It’s a situation most finance chiefs hope never to be in: sales plunging, cash dwindling, debt-covenant violations looming.

Those classic signs of a business in serious trouble are often clear to the CFO long before anyone else at the company understands just how bad things are. As first responders, CFOs play a critical role in determining the fates of distressed businesses — and their own fates often hinge on the outcome.

Guiding a business through a restructuring and turnaround is dramatically different from the usual routine of overseeing the financial operations of a company in steady growth mode. It’s stressful and demanding, often requiring 15-hour days and long, tense meetings with bankers. Some CFOs, however, not only thrive on the opportunity but actually seek it out again and again, transforming themselves into turnaround masters. They develop a highly prized skill set, one that any CFO would do well to become acquainted with, if not specialize in.

Harold Earley is one such CFO. In December 2008, Earley, a veteran of two previous turnarounds, became finance chief at Foamex (now FXI), a maker of polyurethane foam for the furniture and auto markets. He took the job knowing that the company would likely need to perform some sort of balance-sheet restructuring. A public company at the time, Foamex was laboring under a heavy debt load and was already struggling to meet its banking covenants, having emerged from a 2007 bankruptcy still saddled with debt.

But even with that accurate read on the company’s vital signs, Earley didn’t know at first just how dire the prognosis was. “I could tell the company was going to be in default by the end of the year,” he says. “What I didn’t anticipate was how quickly it would occur. In short order I had to sit down with the CEO and say, ‘I don’t think we’re going to make our interest payment this month.’” Within 60 days of starting the job, he helped Foamex file for bankruptcy again.

Today, despite signs that the economy is improving, the legacy of the financial crisis and recession lingers. Many CFOs find themselves working at troubled businesses, often with no prior experience in developing strategies to pull their companies back from the brink. Corporate defaults may be down significantly (the leveraged loan default rate in third-quarter 2010 was just 4%, down from 10% in Q3 2009), but many companies, particularly smaller ones, continue to struggle. Indeed, in the latest Duke University/CFO Magazine Global Business Outlook Survey, 20% of respondents reported that credit conditions were worse than they were in fall 2009. We spoke to restructuring experts and experienced CFOs like Earley, and asked them to share the key steps that finance chiefs should take when they detect unmistakable signals of distress.

Debt defaults are down from the peak of the financial crisis, but restructuring work remains.

Nail Down the Cash

Turnaround advisers and seasoned CFOs agree that getting a handle on cash flow is the top priority for finance chiefs when they start to realize that their companies are in trouble. Earley agrees: the first thing he did upon arriving at Foamex was to focus on cash by analyzing the business’s daily cash needs.


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