When do you need a chief restructuring officer?

At the most simplest level; a company on the edge of insolvency and/or faced with external pressures and uncertainties that are rocking the business. However, underlying most successful restructures is time…doing nothing is ‘too late’. No CRO can perform the impossible because fundamental to success is change… and time is needed for this change to save the company before there is nothing left for stakeholders, including, for employees, their jobs.

 It is not surprising with the Pandemic of Covid-19 many businesses are facing uncertainty. It is arguable more so now than during Lockdown 1.0, and who is to say there will be more Lockdown’s after 2.0… where does an owner/operator or a company’s board turn to? Government bailouts and Treasury solutions are not silver bullets; least of all they are not a steady hand on the tiller of your business needing a calm, measured and decisive stabilising effect.

 What—and who—is a CRO?

CROs have been active for a couple of decades; often referred to as trouble-shooters, problem solvers and many other terms. In the past, a CRO usually came out of an accounting firm, an insolvency practitioner or as an adviser to lenders doing independent reviews of companies. Today, I would argue many business owners or SMEs still go directly to their accountant’s for solutions, however a CRO is something far more and some of the most successful CROs have an eclectic background rich in experience and a certain mind-set. The responsibility of recognising when a CRO is needed lies both with the owners/board and their trusted advisors (accountants / legal counsel). “Trying to do the role” of a CRO loses valuable time. In selecting a CRO, trust, chemistry, and the right situational experience are key whereas the CRO’s role is interim; if they can implement the restructuring programs quickly, their life span in any one job could be as short as a year or up to three years at the outside if it also encompasses an operational transformation. Once they’ve successfully completed the balance-sheet restructuring or subsequent operational transformation, they become free agents, ready to start a new assignment the next day.

 CROs draw on an expansive tool kit but recognise that only certain tools will prove optimal in any given restructuring and that each situation is unique. CROs know how to stabilise the crisis and manage cash, when to raise equity, roll over debt, divest units, equitize debt, or work an insolvency process—and when not to! Above all else effective CROs are exceptional people leaders who strike a balance between challenging teams and offering support. CROs are leaders who both motivate people to change and hold them accountable, while rebuilding trust and consensus across multiple external stakeholder groups with differing views and objectives. But CROs bring another trait that’s crucial to their success, and it would be folly to short-change its value: the ability to communicate. Communicate the restructuring plan to the board, management, employees, secured lenders, shareholders, the pension regulator, the press, and any other key stakeholders. In summary, a CRO is by nature rigorous, detailed with a strong grip on numbers; a good negotiator; an empathetic leader, able to reduce emotions by remaining objective; and skilled connecting with people.

When a CRO is necessary?

Ernest Hemingway once wrote that there are two ways to go bankrupt: gradually, and suddenly.

Likewise, there are two typical situations where the skills and experience of a CRO may be a good fit for an organisation:

 1.      A balance-sheet event creeps up following a period of subpar performance and erosion in balance-sheet resilience. Triggers can include a failure to respond to market changes, an inability to tackle new competitive behaviours, under-delivered integration programs, a failed major acquisition, or a situation in which the company might need new money and the equity owner has suddenly declined to fund it further.

2.      A significant external shock hits demand, prices, or the means and cost of doing business—all while the balance sheet lacks the resilience to withstand the exogenous event. These events could include, for example, the corona virus pandemic, a broad financial crisis, a commodity-price drop, an economic recession, fraud, or litigation.

In either case, a CRO is signalled for when an outside event is expected to cause a breach of covenant or missed repayment on a loan, or a liquidity crisis and overleveraged balance sheet. The company’s board of directors will typically appoint the CRO. This usually occurs on advice from legal counsel or other financial advisers, or when lenders encourage a balance-sheet restructuring due to heightened concerns about a company’s ability to meet its covenants or service its liabilities as they fall due. The key is to be proactive to retain control, giving time to explore all options and to implement the preferred solution, rather than leaving it too late when the company is about to run out of cash.

Why hire a CRO?

1.      The owner or board’s bandwidth is insufficient.

Restructuring situations are complex, time consuming, and high pressured. Full-time leadership is necessary to manage multiple moving parts, work streams, and stakeholders and to successfully navigate the process to a conclusion. Unlike management, CROs can dedicate themselves totally to the successful completion of a restructuring. This removes a huge amount of pressure off the shoulders of senior leaders, frees up the management team to focus on the day-to-day company operations and execute the business plan without distraction. In that regard, the CRO acts as a shield while “arsenals” rain in from multiple directions.

2.      Stakeholders want a trusted, independent view.

An externally appointed CRO can quickly provide lenders and directors with an independent perspective on a company’s situation, business plan, and restructuring options. Typically, a CRO reports directly to the CEO or the board (or chairman of the board); even when the CRO reports to the CEO, they act with full objectivity and have authority to raise issues to the board that are sometimes unresolved within the existing management team. The CRO acts solely in the interest of the company and its stakeholders, serving as an honest broker to quickly instil trust and confidence. CROs can be a sounding board when emotions run high or restructuring solutions need to be debated without bias. CROs have no history with the company, so they are willing to accept changes without getting defensive and do not tolerate any sacred cows. CROs invest time with stakeholders to rebuild trust.

3.      Crisis requires a different mind-set.

In times of crisis, a company needs to shift to a “war footing”. As an experienced practitioner who has been involved in many restructuring situations, a CRO has the survival mind-set needed to bring a relentless focus on cash. CROs know how to dislodge deeply entrenched processes in order to stabilise a company and provide the time to secure a restructuring deal, as well as how to reorient the business plan to underpin the restructuring and engender a bias to action that will help complete the process swiftly.

4.      Instability demands a decisive fire-fighter.

Restructuring situations are breeding grounds for instability in supply-chain continuity, customer retention, and preservation of key staff. CROs’ “know how can do” attitude and experience allows them to counsel management to act decisively when navigating these risks while still keeping the business going as robustly as possible. In my experience you try to keep the business stable and moving forward while all of this noise goes on with regards to your capital structure. If management isn’t engaged in the business, and the business performance is not beginning to improve, that eats into the trust that you’re trying to build back up with not only the secured lenders but also suppliers, employees, and customers.

5.    Debt restructuring requires a specialist toolkit.

A balance-sheet restructuring often means consideration of a wide range of very specific and highly technical tools, from “amend and extend” changes to loans to debt-for-equity swaps, debt or equity injections, M&A, and insolvency tools. These are almost impossible to find in a typical C-suite, simply why would they… leaving the executive team short when it most needs to be observant, anticipatory, and nimble. A CRO is on a first-name basis with these tools or expertise and can quickly propose, and implement solutions. Notwithstanding many CROs have a more detailed legal understanding and thought process.

6.      Interpersonal skills are important.

CROs have a high degree of situational awareness, and experience allows them to be calm, undistracted, and effective under immense pressure. CROs use a wide interpersonal skill set to “win the hearts and minds” of all involved, especially management, which sometimes resist the introduction of the CRO to its team. The CRO leads negotiations with lenders and needs to be a strong influencer who can secure commitment to the restructuring plan from all stakeholders. Lenders can be frustrated, and fairly so.  When emotions run high, the CRO interprets the actions of secured lenders for the board to avoid the wrong reaction. Different stakeholder groups worry about parochial issues, so communications can’t be one-size-fits-all.

How CROs fix problems

In my experience working as a CRO we have four key objectives to ensure a successful restructuring: stabilise the balance sheet, plan the path forward, negotiate the restructuring plan, and expeditiously execute against the plan.

Stabilise.

The immediate focus of the CRO is to stabilise the business and restore lenders’ and shareholders’ trust and confidence in the company. How? First, the CRO will evaluate the current liquidity position and business plan to quantify the size of the problem and determine the runway available to complete a restructuring. Short-term cash management is a top priority; another is often some form of forbearance or standstill. The CRO will then talk with all stakeholders to understand the facts, issues, potential deal blockers, and emotions involved before communicating clear and concise messages that will reassure secured lenders, customers, suppliers, employees, and other key stakeholders as solutions are pursued.

 Plan.

In conjunction with financial advisers, the CRO then pressure-tests the business plan to find optimal restructuring options, such as a recapitalisation, as well as contingency options, such as going through an insolvency process. In addition to debt and equity solutions, the CRO will also consider optimising the balance sheet to release cash and reduce liabilities, for example, by divesting noncore businesses combined with a leaseback.

 Negotiate.

Developing proposals and negotiations is often the longest phase of the restructuring process, and the most harrowing as the clock ticks and the risk of a liquidity shortfall rises. The talks can involve a complex group of stakeholders with competing objectives and opposing views as to the end state. CROs must act like the conductor of a symphonic orchestra—while they are not playing every instrument, they are coordinating the process and pulling strings whenever required to unite all parties in support of a final restructuring plan.

 Execute.

An effective CRO excels in project management, staying disciplined, and installing a steady restructuring cadence while working closely with financial advisers and lawyers to navigate any potential deal blockers and implement the agreed restructuring plan.

 Finally, it is important to note that the CRO does not conduct alone—for what is an orchestra without its first chairs? The CRO will work with and rely on a supportive management team, an agile finance team, and strong financial advisers, public relations professionals, and lawyers to successfully restructure the organisation.

 Amid on-going global disruption, executives and board directors may increasingly face restructuring situations. A CRO brings a specialist mind-set and tool kit that enhances an existing team and helps see the organisation through a period of extreme crisis. The CRO shoulders the restructuring by working with a small, experienced team, allowing other executive leaders to focus on customers, suppliers, employees, and the daily running of the business. When trouble strikes, organisations should not be afraid to appoint a CRO, but rather, should embrace the opportunity to change the company’s trajectory with their help and ensure long-term survival.

This article is intended to be thought provoking and challenge as to why you do what you, and how you do this as a leader which ultimately results in what you do.

Anton de Leeuw

[email protected]

07538 946 032