VideoStill, the CFO has to know at what point it makes sense to capitulate and live to fight another day under Chapter 11. Many executives desperate to avoid bankruptcy wind up hollowing out the business by collateralizing all the assets or selling the company's best assets to raise cash and extend the runway, says Buckfire. One common result: companies without assignable collateral wind up paying exorbitant terms on debtor-in-possession financing. "It takes tremendous discipline to not liquidate and say, 'We'll work it out,'" Buckfire says.
2: Explore the "Prepack" Option
In a "prepackaged" bankruptcy, creditors, bondholders, and other constituents agree to support a plan of reorganization before the company files with the courts. Remy International Inc. was the third major U.S. auto supplier to file in 2007. It spent only 59 days in Chapter 11 (the average is about 16 months). But the debt-laden company had spent months prior talking to bondholders, says CFO Doug Laux. The filing allowed Remy to reduce its long-term debt by $360 million and then focus on its operational repair, Laux says.
Prepacks are most appropriate for a straight balance-sheet restructuring, when a company is, for the most part, operationally sound and current on trade agreements, says Jonathan Carson, president of Kurtzman Carson Consultants, a claims and noticing agent servicing corporate restructurers. Importantly, none of Remy's creditors took a significant haircut in the recovery, Laux says, which made the process faster.
The caveat is that prepacks can cause issues with valuation. Because the operational restructuring comes after the reorganization agreement, the bankrupt entity's valuation will be partly based on actions that haven't yet been taken, Lenhart says. And that risk lowers the company's valuation, giving creditors that are swapping debt for equity, for example, a larger share in the business.
3: Fix the Business
While in the weeks prior to filing Chapter 11 a smart CFO focuses on the analytical work of restructuring, once a company files, experts say, the priority has to be fixing the business. "The CFO has to immediately start paring costs" to preserve cash flow, says Kuoni of CRG Partners, who has stepped into CFO roles in crisis situations. "I've been in situations where we had large equipment leases and on the first day of filing rejected them and sent the equipment back to the owner," he says.
The cash-flow forecast "operates in real time" and becomes a critical tool in this period, KCP's Dinoff says. "You have to know how much time is left before the company is completely out of funds. You want to get from that crisis stage to stabilization quickly."
While steering New York–based St. Vincent's Catholic Medical Center through Chapter 11 in 2005, CFO Martin McGahan fought immediately to preserve liquidity and cool a $10 million per month cash burn at the 600-physician hospital. "We had a shrinking number of beds as well as revenue and collection problems," says McGahan, a managing director at turnaround advisory Alvarez & Marsal. McGahan evaluated the location of the large, critical receivables; determined the priority of payables; and sought to minimize spending in other areas, such as the hiring of consultants. "As you track cash, it exposes a lot of the broken processes inherent in the system that leads to a real tactical response," McGahan says.
Within a little more than a month of Sullivan's coming on board at Solutia, the company had instituted price increases on some of the plastics it manufactures, closed its acrylic-fibers business, and formed a team to build market share in the Far East. "We needed to demonstrate to financial institutions that we could stop the bleeding," Sullivan says. Long term, while still in Chapter 11, the company was able to invest cash into opening a new plant in China to build Saflex, a special type of protective glass.
Similarly, Dana Corp. focused on "a massive rehabilitation of its business-cash flows and income statements and not just a balance-sheet fix," says attorney Corinne Ball, leader of the bankruptcy practice at Jones Day, which advised the auto-parts maker. The changes played no small part in Dana's attracting a $790 million preferred-equity investment led by Centerbridge Capital Partners and a $2.1 billion debt financing to exit Chapter 11.
4: Talk It Out
When a company is in bankruptcy it is natural for employees — and the company as a whole — to lower their heads and cease communicating. But the opposite is required. Within days, if not on the first day, management has to set up cross-functional communications to break down the silos, says McGahan. "Operations has to know who to call in finance if there are no supplies on the shelf, and marketing has to know the strategy from the finance and operational perspective," he says. Employees "need to have operating guidelines. They can't sit in crisis mode for 90 days," Dinoff says.
Communication to the outside world has to be assigned to the right personnel. The CFO may be the one who has to call the credit manager of the company's largest supplier, explain the rescue plan, and negotiate the terms on which the vendor will start supplying product, he says. The aim: to demonstrate that the business will continue to exist and creditors won't get burned.
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