Planning for successful restructuring
What matters, and what factors determine success?
Gloomy economic prospects, higher financing requirements and an easier legal framework are likely to lead to more corporate restructurings. For a restructuring to be successful it has to have a clearly defined plan that is implemented in a skillful and focused manner by an experienced team of specialists. What matters in a restructuring plan, and what are the factors that determine its success?
MORE RESTRUCTURINGS EXPECTED
While some of the key economic indicators are suggesting that the worst of the financial crisis in Europe is over, the International Monetary Fund’s economic forecasters have just marked down Europe’s prospects yet again. They expect the euro area’s output to shrink 0.2 percent this year and to recover very slowly in 2014. Companies are increasingly talking of cost-cutting programmes, capacity adjustments and shorter working hours. In some industries, the double-dip scenario discussed when the financial crisis first erupted is already a harsh reality. The combination of gloomier economic prospects, greater uncertainty about lending and the need for companies to have more equity mean that market players are drawing up restructuring plans and thinking about how they are going to implement the measures and considerations involved.
The gloomy economic prospects and higher financing requirements can be expected to reinforce the relevance of drawing up and implementing successful restructuring plans.
The details of how each individual plan is drawn up and implemented depend on the severity of the crisis and the stakeholder structure of the company in question. It is nevertheless possible to pick out key elements that significantly increase the likelihood of operating or financial restructuring being successful.
WHAT A RESTRUCTURING PLAN NEEDS TO COVER
The law does not specify what has to be included when drawing up a restructuring plan. To set out what is expected of stakeholders (such as lending banks), anyone drawing up a restructuring plan has to bear in mind legal precedents from the highest court and guidance from professional groups.
CASE STUDY: IMPACT OF GERMAN LEGAL CHANGES
Last year saw changes in the law on the framework for restructuring companies in difficulties. The main provisions of the German Company Restructuring Facilitation Act (ESUG) came into effect on 1 March 2012. The protective shield proceedings this has introduced are a sign of the intention to focus more on restructuring viable companies and treat insolvency as a real opportunity than has previously been the case. It allows three months from filing for insolvency to draw up a restructuring plan under the supervision of a temporary administrator, during which no enforcement proceedings can be launched; this can then be implemented as an insolvency plan.
Restructuring plans typically use a modular, two-stage approach: The first stage involves drawing up operational measures to ensure viability, i.e. making sure the company is a going concern that is solvent and not over-indebted). In the second stage, the aim is to develop a model for the restructured company that ensures it is sustainably competitive and profitable (ongoing viability).
Key elements to include in a restructuring plan are:
- A description of the subject matter and scope of the task
- A description and analysis of the business background
- An analysis of the causes of the crisis and the stage it has reached
- A model for the restructured company
- A programme of measures to be taken
- An integrated restructuring plan
- An assessment of whether the restructuring is viable, i.e. whether an objective consideration of the plan provides serious and well-founded prospects of a successful restructuring within a reasonable period.
DRAWING UP AND IMPLEMENTING RESTRUCTURING PLANS: KEY FACTORS FOR SUCCESS
The corporate crises that often make a restructuring plan necessary can generally be divided into strategy, success and liquidity. The content and measures included in a restructuring plan depend on the stage and extent of the crisis and the specific stakeholder structure.
Apart from meeting the (minimum) requirements mentioned for restructuring plans and allowing for specific individual features, it is possible to identify general characteristics of effective restructuring advice that significantly increases the likelihood of success:
Focus on what matters
While it is essential that the documentation and analyses mentioned are provided, care must always be taken to ensure that the focus is on information which is relevant to taking decisions and that this lies at the heart of the restructuring plan. This means specifically:
- Providing the right degree of transparency for the people being addressed: for example, the analysis of the company’s present position must not pull any punches—operational problems or structural barriers that could impede the restructuring must be pointed out and the parameters to be met for servicing debt and equity must be made clear.
- The strategic focus of the plan must be spelled out: what matters is not working through data about the past but answering the question of how to get a grip on the crisis and make the company viable. The central anchor has to be developing and implementing immediate operational measures and planning the model for the restructured company to make it sustainably viable.
- There has to be a focus on action: every restructuring requires a central programme of measures setting out detailed action and specific requirements to be met in order of importance. The programme of measures is effectively the blueprint for implementing the plan and so must be compatible with it.
- This should be summarised in a robust business plan. The results of all analyses and restructuring measures must be shown in an integrated business plan, along with their impact on the balance sheet, income statement and cash flow. The plan must be resilient, i.e. stress-tested, and provide a firm benchmark for measuring the state of progress throughout the restructuring.
Plans must always be designed so the objectives and action on which the programme of measures is based can be achieved and implemented within the relevant timeframe. Each measure must be based on a realistic objective. It can be an advantage if a plan is drawn up using skills and experience gained in successfully implementing other plans: an advisor skilled in implementation will generally be able either to assess relevant programmes faster and better or set priorities and make choices that improve the likelihood of successful implementation – both of which significantly increase the probability of the restructuring being a success.
Practice has shown that it is not sufficient to set out the restructuring measures proposed by the company management in a restructuring report. Their practicality and how long they will take must also be scrutinised critically. For the latter in particular, having an experienced restructuring advisor is a key advantage. Depending on the stage of the crisis, this applies to measures focused on liquidity just as much as adaptations to organisational structures and processes all the way through to setting a new focus and designing business models to give competitive advantage.
Interact with all stakeholders: the CRO as leader of the restructuring
When it comes to implementing the recommendations made in a restructuring report, stakeholders often insist on appointing a Chief Restructuring Officer (CRO). The CRO position is that of an interim manager and normally brings together all the tasks involved in total crisis management, from implementing structural and operational measures to negotiating refinancing. An experienced CRO can relieve the burden on managers who are often not specialists in this area. The CRO also takes on managing the restructuring process and coordinates and communicates with all relevant stakeholders. The greatest impact often comes from being directly responsible for implementing the crisis measures and acting as an honest broker on behalf of all interest groups.Management and communication skills are essential. A CRO can reduce mistrust between the parties involved by creating transparency and setting priorities. When it comes to questions on change processes in the company, the CRO is a knowledgeable and informed point of contact. Their involvement is time-limited from the start and linked to measurable objectives; once these have been achieved, the exit process starts. The CRO ensures the implementation of the operational, structural and financial measures set out in the plan and is a central success factor in re-orienting the company.
Skilled restructuring management that uses an advisor who can get things done to ensure the measures in the plan are carried out, involves all relevant stakeholders, creates transparency and regains trust and security, is a key driver when it comes to successfully restructuring a company going through a crisis. The more closely a restructuring is focused on the key issues for survival, and the more realistic the measures chosen when drawing up the plan, the greater the chances of success. It is no use drawing up the right plan for a crisis and making the right recommendations for action unless liquidity can be generated, debt serviced on time and cost cutting implemented. Efficiency improvements also have to be clearly felt in improved cash flow and profitability. Appointing a temporary CRO can be an important aid in this.