“How did you go bankrupt?
“Two ways. Gradually, then suddenly.”
- Ernest Hemingway, The Sun Also Rises
Whether from internal or external factors, every company at some point will experience financial stress. The key to avoiding the extreme zone of financial distress—insolvency and “suddenly” bankruptcy—is to be proactive early on—when financial challenges are progressing “gradually.”
A good first step in the “gradual” phase of financial distress (e.g., cash deterioration) is to seek the advice and guidance of experts who understand the landscape that can draw companies into bankruptcy and can help you avoid it. Reaching out for help early allows for the time needed to explore as many alternatives as possible.
A company’s possible downward journey can be classified into Four Stages of Restructuring:
- Management Stress & Denial
- Stakeholder Activism
- Bargaining with Stakeholders
As expert advisors focused on operational and financial turnarounds, we know that arriving on the scene in stages three and four, leaves limited time to act. Advisors need time to (i) understand the company’s business and capital needs, (ii) evaluate the company’s capital structure and overall financial health, (iii) formulate the alternatives for raising new capital and/or working out deals with all the company debtholders, and (iv) define and execute alternative courses of action. And as Hemingway wrote, and countless chapter 11 debtors understand, time is not “linear” as financial stress builds — it speeds up as you enter stages three and four, robbing a company of precious time to assess, plan, and execute.
Out-of-court Restructuring = A Win for All
A common misconception is that once restructuring advisors are involved, it’s a death spiral into bankruptcy. It is quite the opposite — we keep a “gradual” slide into bankruptcy from flipping into a “sudden” inevitability. At Ankura we know that restructuring outside of bankruptcy is a win for all stakeholders. This allows the business to continue operating and avoid the adverse publicity and heightened costs of a public bankruptcy filing. As a result, the entire ecosphere of the company is likely to remain healthier – more employees are retained, customers continue to buy the company’s products, and suppliers remain confident, continuing to sell goods and services to the company on normal trade credit terms. The company’s debt and equity holders will have to compromise on their claims, but on a consensual basis, and without the substantial costs and professional fees related to a bankruptcy proceeding.
How Time Helps - the Three Key Tasks to Avoid Bankruptcy
In the first stages of restructuring, the three most important tasks for management and their advisors are to:
- Understand and implement changes internally
- Re-establish credibility with all affected stakeholders, debtholders, suppliers/trade creditors, equity holders, and employees
- Explore alternatives to alleviate financial stress
Let’s examine each of these briefly.
Most companies know what they need to change to improve their financial performance, but retaining experts provides management with an independent view and helps a company execute faster and with a greater degree of success. Restructuring advisors can help companies get closer to the root cause(s) of their financial stress, which is often a combination of factors: underlying business fundamentals (i.e., competitive pressures, secular industry dynamics/disruption, supply/demand changes); operational shortcomings; and, of course, unsustainable debt.
After determining the root cause(s), the company must carefully respond to the situation internally. The restructuring and operating performance advisors at Ankura have years of experience assisting companies in structuring and implementing responses, using proven strategies for operational improvements and changes in products/suppliers/trade credit. Given time and assistance, the company may be able to respond to its challenges, avoiding the cost, reputational damage, and a much more publicized and extensive debt and equity restructuring. But it is essential to seek outside help as early as possible.
Frequently in these situations, the company’s operational and financial forecasts have been incorrect – sales fell short, costs increased, a proposed capital raise failed, or other unanticipated exogenous events occur (e.g., supply chain constraints such as those caused by the COVID-19 pandemic). Whatever led to the current financial stress, the company failed to foresee or react quickly enough to the changes. Establishing a new level of credibility is key with all stakeholders – debtholders, suppliers/trade creditors, equity holders, employees, and, if applicable, regulators. Revising the company’s forecasts and meeting them is critical to re-establishing that credibility and is key to the next task – exploring alternatives. The time required to establish credibility is most often the Achilles' heel of a restructuring engagement. If the runway is too short to give stakeholders enough comfort with the company’s revised forecast, then it is very challenging to engage them in serious restructuring discussions.
Critical to re-establishing credibility is a well-reasoned, deliberate plan of communication with key stakeholder groups, including employees. Companies by and large avoid proactively communicating early on issues of financial stress and taking actions to address this will lead to a more constructive restructuring. Nobody likes to deliver “bad news.” But one common element in many bankruptcy filings is the failure of a company to communicate frankly and timely with key stakeholders at the onset of the financial issues. All stakeholders hate being surprised by bad news, and the failure to be candid up front creates a major obstacle to re-establishing the company’s credibility needed for effective restructuring negotiations. As companies like Meta have shown in 2023, proactively communicating on emerging financial challenges and the actions the company is taking to address them can be received very positively by stakeholders.
The third step is exploring actions with various stakeholder groups to relieve financial stress. This is where experienced restructuring professionals can prove invaluable in identifying a much greater number of paths than a company could conceive — experience counts double in the (hopefully) rare situation that companies face in financial stress. Examples include pursuing one or more of the following: new capital injections; entering a joint venture with a better capitalized partner; refinancing or restructuring existing debt; selling non-core assets; establishing a new long-term supply arrangement; establishing new customer relationships.
Exploring these alternatives, especially those with parties not currently involved with the company, takes time. Potential new business partners/stakeholders need to be identified and will conduct due diligence on the company’s historical and current operations and finances, which, if successful, will lead to negotiations on contractual terms and the completion of final agreements. This process always takes more time than anyone anticipates. If a company is already in an advanced stage of fiscal distress (e.g., facing a debt maturity), then insufficient time may exist to adequately explore these alternatives, potentially forcing a bankruptcy filing.
Finding the Right Advisors
If you are involved with a stressed company, look for a firm that can help with all three of the key tasks – internal review and implementation, establishing credibility, and exploring alternatives. At Ankura, we have the full slate of professionals and services that address all of these needs. Our teams are experienced in providing:
- Identifying and implementing operational improvements
- Improving financial planning and forecasting
- Establishing communications with stakeholders that facilitate the necessary restructuring discussions
- Formulating strategies with external stakeholders and supporting negotiations with those stakeholders, from suppliers and customers to debt and equity holders
Orchestrating and Implementing Financial Restructurings
Whether you are an independent board member, corporate counsel, or a member of management, we welcome the opportunity to discuss your situation – the areas of stress, the possible root causes, and potential avenues to halt the progression towards deeper levels of financial distress. We will bring our experience and expertise to turn around the situation and, if possible, avoid progressing into “sudden” bankruptcy (the dreaded Fourth Stage of Restructuring).