Goulston & Storrs bankruptcy attorney Doug Rosner recently collaborated with Thomson Reuters to create a three-part video series regarding alternative solutions to the financial problems of distressed companies. This summary highlights the key elements to a successful out-of-court restructuring (part two of the series).
see video here.
APPROACHES TO RESTRUCTURING
The art of restructuring requires a feel for the right approach fitted to the situation of each distressed borrower. Here are some of the approaches a borrower might take in negotiations:
- If there is one senior secured lender, it generally makes sense for the borrower to talk with that party first. That lender often provides essential ongoing liquidity to the borrower and the consent of that lender can help pave the way for consents from more junior creditors.
- A borrower might consider opening dialogue with a well-crafted letter to all creditors, inviting their input on a plan, which frequently has a good response rate.
- A borrower might also consider focusing first on a group of the largest and most critical trade creditors, talking to them in some strategic sequential order, or inviting a “committee” approach with them before taking a detailed plan to the larger creditor population.
- A borrower could consider calling its creditors for personal dialogues, starting first with the biggest and most critical among them, and then replicating the process among the smaller creditors that will have less negotiating leverage and less at stake.
Really, the approaches are limited only by the creativity of those involved and the financial situation of the borrower. Regardless of approach, there are a few steps that should be carefully considered in every situation, including:
- Planning to pay essential equipment lessors, which often provide copiers, vehicles, and other important equipment at fixed monthly prices that often cannot be negotiated due to every lessor’s financing arrangements with their own banks.
- Obtaining necessary landlord concessions or deal restructurings to facilitate profitable operations at every site.
- Obtaining landlord consents to assignment or subletting at sites where operations should be strategically abandoned.
ASSIGNMENTS FOR THE BENEFIT OF CREDITORS
Another legal tool available to distressed companies is the assignment of assets for the benefit of creditors. Such an approach, which generally or frequently involves all or most of a distressed company’s assets, can often produce liability-insulating consents from creditors.
One way to facilitate this approach is to appoint a mutually satisfactory neutral fiduciary to run a sale of the borrower’s assets and interact with all creditors. The neutral then distributes to creditors the ultimate proceeds of any sale or sales, either on a pro rata basis or otherwise as agreed among the parties.
The buyer(s) or assignee(s) typically ask for creditors to consent to the sale(s) as a condition of sharing in the proceeds, leveraging the fact that many creditors will want to deal with a more solvent buyer on an ongoing basis.
This approach can be flexibly tailored to fit the needs of a total or partial liquidation, or the sale of ongoing business to a purchaser of substantially all the assets.
Benefits: The borrower, any lenders and the ultimate buyer of assets can obtain some measure of insulation against attack by obtaining creditor consents. The creditors have the comfort of dealing with a neutral fiduciary rather than the distressed borrower’s management team with whom they may have disagreements and trust issues.
Examples: Recently, Goulston & Storrs has successfully used this tool for the benefit of distressed e-commerce retailers and catering equipment companies.
ESSENTIAL ELEMENTS OF SUCCESS
No matter what kind of collaborative approach a distressed company takes to resolving or restructuring its debt, there are certain essential elements of success in the execution of any plan:
- Transparency. The distressed borrower must be transparent in all dealings with creditors, many of whom may have already lost faith in management. Creditors will want to see historical financial statements that are complete and accurate, as well as a detailed and cogent business plan before they approve any restructuring.
- Strong Management. To trust in management’s restructuring and recovery plan, creditors must see a strong management team that is credible, honest, and smart.
- A Good Story. Management should have a good and accurate story to tell about how the debtor became distressed and how management has tried to address fundamental problems.
- Concessions. Creditors will want to see some concessions by the debtor’s management team, some sharing of pain, and some assurance that management will not be unjustly enriched.
- Equal Treatment. The management plan for restructuring and recovery should treat all similarly situated creditors equally.
- An Approach that Mirrors Chapter 11. A successful plan for payment of creditors is likely to mirror the terms of Chapter 11 regarding appropriate plan objectives, statutory preferences on payments, treatment of various classes of creditors, and other provisions.
A distressed debtor that knows how to collaborate with lenders and other creditors in formulating and executing a sound restructuring plan can often recover without having to suffer the time, distractions, and expenses of a multi-party Chapter 11 bankruptcy reorganization.