15 May 2020
Is the Chief Restructuring Officer the key to avoiding a debt crisis and creating business sustainability?
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After the immediate COVID-19 crisis, will a Chief Restructuring Officer help create a sustainable ongoing business, secure a return for the lender, and avoid a debt crisis.
Following the Covid-19 pandemic, many companies will find themselves highly leveraged and facing difficult trading conditions. The likelihood is high that many good companies will find survival challenging.
An imminent increase in business failures over the next 12-18 months looms large with many unable to recover having gone into significant debt to stay afloat while revenues are much reduced.
This scenario can in a many cases be prevented by the major creditor (typically banks and lending institutions) and the company working together towards a solution.
Much has been learnt post the 2008 economic crash and the need to act swiftly is critical to survival.
To act swiftly,it would be up to the creditor or the organisation themselves to employ a Chief Restructuring Officer, with executive powers, to work with the company while reporting back directly to the major creditor.
Typically this person would have a turnaround/ restructuring track record and know the sector thereby allowing them to hit the ground running. In addition, this allows the existing management to focus on the day-to-day management of the company in difficult trading conditions.
Four essential questions before engaging a Chief Restructuring Officer
To fully understand the merits of this proposal it is important to examine and define firstly, what is the role of a Chief Restructuring Officer?
Secondly, why use a Chief Restructuring Officer?
Thirdly, the Profile of a Chief Restructuring Officer.
And finally, what are the advantages to the organisation and banks in engaging a Chief Restructuring Officer?
What is a Chief Restructuring Officer?
During the post-2008 recession, it became quite common for turnaround professionals to be employed as Chief Restructuring Officers rather than as consultants.
Creditors and organisations themselves are now directing such companies to retain turnaround professionals as Chief Restructuring Officers, rather than as consultants.
So what does a Chief Restructuring Officer do and what differentiates this role? Some key pointers are as follows:
- A Chief Restructuring Officer has primary responsibility for the restructuring of the company's balance sheet
- The incumbent managers run the firm's operations while the Chief Restructuring Officer focuses on what must be done to satisfy its creditors
- The formal title is necessary because if a turnaround specialist is brought in as merely an outside consultant, he or she may not have enough authority to do the job correctly. So, a Chief Restructuring Officer is hired in part to satisfy the firm's creditors, who may in some instances have a voice in his/her selection
- Creditors typically support the engagement of a Chief Restructuring Officer and in many cases encourage or even demand such engagement to ensure access to information, the credibility of reporting and an outside view of management that focuses on creditor expectations rather than the day-to-day operations of the company.
Why use a Chief Restructuring Officer?
There are a number of important reasons to engage a Chief Restructuring Officer:
- A Chief Restructuring Officer has greater authority to direct a reorganisation process than a turnaround consultant, and greater independence over existing management. He/she may report directly to the Board much like the internal audit or risk functions.
- The Chief Restructuring Officer is vested with executive decision-making powers. If appointed by the creditor, direct access to the Chief Restructuring Officer is given to the creditor constituency responsible for the Chief Restructuring Officer’s appointment. The Chief Restructuring Officer has the authority to meet privately with the creditor constituency and otherwise deal with that creditor as to the administration and formulation of a reorganisation plan.
- It is important to decide clearly who makes the appointment (i.e. the organisation itself or the creditor) as the powers and reporting lines are different.
- If appointed by the creditor, a Chief Restructuring Officer may take away the decision-making power of the debtor and transfer control of the administration of a reorganisation to the creditor. At a minimum, the retention of a Chief Restructuring Officer puts a greater distance between the turnaround professional and the debtor’s shareholders, which in turn makes it more difficult for shareholders to disrupt the Chief Restructuring Officer’s efforts in the reorganisation process
The profile of a Chief Restructuring Officer
When finding a suitable Chief Restructuring Officer, it is critical to specify and agree the profile sought. A typical profile would include the following fundamental elements:
- Hands-on expertise and experience in the debtor’s industry and in restructuring/ turnaround
- An ability to interact with and bring together the different sectors of a company’s business and its various stakeholders
- Ability to quickly establish control through trust and credibility
- Ability to diagnose issues quickly and build a consensus with stakeholders for implementation
- Track record of implementation in a turnaround environment utilising a broad skillset (not just financial)
- Strong tendency towards action
- Proven judgement and decision-making skills
- Proven leadership capabilities with a more directive style
Advantages to lending institutions in engaging a Chief Restructuring Officer
Typically, banks are the major creditor and have a dual purpose of securing repayments while also securing the medium to long-term viability and sustainability of the company. There are six very significant advantages to a bank engaging a Chief Restructuring Officer as follows:
- Securing debts and banking relationship
By utilising this solution and engaging a Chief Restructuring Officer who meets the specification outlined above, there is a high probability of securing the bank’s loans and its longer-term banking relationship. This is the dual goal and outcome sought.
- A cost-efficient solution
This solution is not as costly as an Examiner/ Receiver. A Chief Restructuring Officer may have previous industry experience and may not require as much time to become familiar with the debtor’s business. Accordingly, the Chief Restructuring Officer is unlikely to need new or additional professionals such as lawyers, financial advisers, etc. and is more likely to work with current management rather than replacing it.
- Avoids bad PR
The appointment of a Chief Restructuring Officer is preferable to both debtors and creditors than the more drastic remedy of examinership/ receivership/ liquidation. It is a proactive step that seeks to benefit both parties and their wider stakeholders.
- Statement of support to business
A Chief Restructuring Officer with industry and/or turnaround experience will provide assurance to stakeholders that the debtor is serious about its restructuring and not looking merely to administer the estate towards liquidation.
- Allows for day-to-day business focus while restructuring
The Chief Restructuring Officer works with the management team and allows the team to focus their efforts on the day to day operations. Given that the trading environment is already difficult it is critical that management can focus fully on customers and operations while the Chief Restructuring Officer focuses on the restructuring.
- Control and transparency
This allows the bank to have full control and transparency with reporting and on-going monitoring. This provides assurance to the bank as to progress and allows input from the bank and a more complete understanding of the “true” situation and issues faced by the company.
Building a platform for the future
By utilising the skills of a Chief Restructuring Officer, organisations and banks can help create a sustainable ongoing business to survive this current crisis and build a solid platform and balance sheet for the future.
Acting swiftly with skill, expertise and know-how is key. To quote an unknown (but smart) source, “Running into debt isn’t so bad. It’s running into creditors that hurts.”