The Role of the CRO in DebtorLender Communications in Bankruptcy
An overlooked but critically important part of the bankruptcy process is effective communication between the debtor and its secured lenders. Too often, when a company enters the zone of insolvency, management-banker relationships become strained, leading to a constriction in the flow of information between the two, heightened suspicions on both sides and, as a consequence, the blocking of opportunities for the type of collaboration needed to address the issues at hand. The broader concern that today's bankruptcy system tilts inherently in favor of the secured creditors only heightens the pressure on the debtor-lender relationship, as both parties sense that every action they take is under increasing outside scrutiny. Again, the result is a tendency to communicate less rather than more.
One suggested solution for this situation is to have the Chief Restructuring Officer (CRO) take charge by donning the cap of chief communicator, in addition to wearing their other, more visible hats. The CRO working in this capacity benefits both the debtor and secured lender, and more broadly, the other parties-in-interest as well.
The Context for the CRO Appointment
Like the emergency room physician, the CRO seldom arrives on a cheerful scene. Typically the CRO has been brought in by the debtor, the company, at the recommendation or insistence of the debtor's secured lenders, who have felt compelled to make this recommendation because of the poor historical performance of current management. For whatever reason, under their watch the company's performance has declined, value has eroded, loan covenants have been tripped and concern about the firm's ability to meet its financial obligations to its secured lenders (as well as its unsecured lenders, employees, investors and others) has spiked.
The bankers' concerns with current management tend to be multifaceted and reflect a loss of confidence in management's ability to:
- acknowledge and address the company's problems;
- solve the company's problems;
- navigate the company through the bankruptcy process;
- provide necessary information without the additional resources and experience that a CRO brings, and
- enhance the quality and integrity of communications between the debtor and lender by ensuring that someone is in place with credibility who understands the mindset and information needs of the bank.
A chapter 11 situation amplifies the need for proactive communications between debtor and lender, but it also increases the barriers to achieving it.
Removing barriers to communication improves the flow of information and the degree of trust between parties, which in turn leads to a better environment for cooperation and prepares the way for attacking the critical issues of assessment, enhancement and allocation of value.
How the CRO Improves Debtor/Lender Communication
The CRO's ability to improve communication between a debtor and creditor stems from their:
- experience in similar situations: As a restructuring professional, the CRO can draw on a wealth of useful experiences analogous to the current situation, providing a valuable source of insight for developing approaches and solutions to improving communications.
- deep understanding of the needs and concerns on both sides of the divide: A CRO will, by training and experience, be someone who can "talk the talk and walk the walk" of both parties. For example, the CRO can assist the debtor by helping the lender understand some of the conditions at the debtor that may have either led to the current difficulties or that may be inhibiting progress in implementing the plan.1 On the flip side, many corporate executives are unaware, or perhaps less aware than they should be, of what drives their secured lenders' requests. The CRO can help the debtor's management improve its relationship with secured lenders by enhancing management's understanding of the many factors influencing the lenders' decisions.2
- streamlined reporting requirements: Because the CRO reports directly to the debtor's board of directors rather than its CEO, the CRO can make and implement decisions more expeditiously than if all matters needed to be routed through the CEO. While some experts have objected to this very dimension of the CRO reporting requirements, it in fact benefits all parties involved by freeing up the CEO to stay focused on the day-to-day affairs of the business. By not being handcuffed to the CEO, the CRO can focus on leading the company through whatever changes need to be undertaken. Since the board retains fiduciary responsibility for the company and, hence, must ultimately approve its strategic direction, having the CRO report directly to the board rather than the CEO is the most efficient means of maximizing value through whatever course (restructuring, selling or liquidating) is determined.
Conclusion
A chapter 11 situation amplifies the need for proactive communications between debtor and lender, but it also increases the barriers to achieving it. Experience and understanding of both creditor and debtor situations coupled with the advantages of a streamlined reporting structure, provide the CRO with the necessary tools for enhancing debtor-lender communications and thus improve the ability of the parties to work together to determine and then implement a course of action that maximizes value.
By bringing a unique combination of background and skills to the bankruptcy process, the CRO is well-suited to the work of creating an environment where communications between debtor and secured creditor are maximized, and indeed where relations among all the parties-in-interest are coordinated as smoothly as possible—even in what are extremely trying circumstances. The result is a working environment vastly more conducive to addressing and successfully resolving the critical issues at hand in the bankruptcy process.
Footnotes
1 These conditions might include (among others):
- reticence on the part of management to "let go" of past practices and senior executives that have proven ineffectual;
- a "circle-the-wagons" mindset among senior management coupled with a "who-are-you-to-tell-me-how-to-run-my-business" attitude;
- evidence of ineffective organizational structures, such as weak information systems, a poisoned culture, a general lack of planning across the business, etc.;
- evidence of ineffective operational strategies for managing working capital, direct costs and overhead, customer vs. product profitability, product development, etc.
- external factors such as regulatory or legislative changes (e.g., the impact of "do-not-call" legislation on telemarketers), terrorist acts and so on; and
- fundamental competitive or industry shifts. Return to article
2 Among others, these factors include:
- the financial institutions' or its individual decision makers' workout philosophy or policy;
- inability to gain inter-creditor consensus;
- fatigue with the credit;
- the magnitude of the credit and the impending loss;
- the banks' collateral position supporting its claim;
- the degree and timing of reserves taken;
- the cost of "holding" as compared to the perceived incremental recovery;
- their view of the risk inherent in the company's restructuring plan;
- the relationship with and confidence in management;
- the perceived time required and complexity of successfully negotiating a consensual plan; and
- the perception and trust of plan participants, with whom the banks may continue to be or become bedfellows. Return to article