FORUM: Pre-insolvency reorganisation and restructuring
FW moderates a discussion on pre-insolvency reorganisation and restructuring between Simon Granger at FTI Consulting, Elaine Nolan at Kirkland & Ellis, and Van Durrer at Skadden, Arps, Slate, Meagher & Flom.
FW: In your experience, are failing companies often reluctant to admit to underlying problems and act quickly to solve them with decisive reorganisation and restructuring action?
Granger: Management teams may lack the skills and experience to see and act upon difficult restructuring decisions, instead adopting a wait and see approach with the hope that a business will trade out of the issues it is facing. Benign economic conditions and a low interest rate environment have exacerbated this tendency. It can be difficult for a board to prioritise stakeholder interests and effectively manage competing agendas. This is where advisers can bring real value to the restructuring process. With extensive situational experience the adviser can act as an impartial ringmaster in stakeholder negotiations and drive the restructuring to its conclusion. Management teams which take the lead in proactively driving the process forwards and delivering a credible and coherent restructuring solution are often able to achieve a more successful outcome than those which take a passive role, allowing stakeholders to play out their negotiations before them.
Nolan: Our clients include sponsors and strategic investors who are experienced and adept in monitoring business performance and the financial obligations of their portfolio companies. Typically, they will have strong management teams in place who are fully aware of the company's financial covenant tests and reporting obligations pursuant to their loan facility agreements. In my experience, our clients think creatively to solve future problems and do not shy away from any underlying liquidity or financial issues. Instead, they use their extensive market and commercial know-how to explore feasible options with their advisers. This can also include appointing interim management, for example turnaround specialists, to assess the business.
Durrer: It is a natural human instinct for people to avoid conflict or stress. The situation is no different for the managers of companies that are in distress. As advisers, it is important for us to remind the officers of the company that challenges confronting the company do not represent personal failings. Rather, they are often cyclical issues faced by almost every business from time to time. Often, we try to introduce real world solutions into the equation so that officers of distressed companies can better visualise the road ahead, as opposed to the pathway that led up to the distress.