Introduction
A restructuring transaction can be an extensive and complex journey for organisations facing financial challenges. It requires meticulous planning, collaboration among the stakeholders involved, and a clear roadmap to addressing the complexities at hand.
In this article, we delve into key insights gathered from Ankura’s restructuring team, shedding light on some of the crucial aspects of successful restructuring processes, and the role that each stakeholder plays in the process.
Key Focus of Management Teams as They Embark on the Restructuring Journey
The management team plays a pivotal role in navigating the complexities of restructuring and getting the organization ready for the challenge and what comes after.
Firstly, their responsibility lies in assuming control of the situation by understanding the root causes of underperformance while maintaining a forward-thinking perspective. This entails assessing various operational challenges that have led to financial underperformance to identify areas for improvement and implement corrective measures.
Central to this effort is gaining control over cash flow, recognising its critical importance in sustaining operations, and funding the restructuring. Simultaneously, the management team, often with the help of advisors, must develop a robust restructuring plan encompassing both financial and operational strategies, which will serve as a cornerstone in discussions with the lenders. By actively addressing these aspects, the management team demonstrates their proactive approach and commitment to steering the company toward stability and success.
In that context and aside from demonstrating the robustness of this plan financially and operationally, one of the key factors to running a successful restructuring process is driving consensus, harmony, and bridging expectation gaps between internal and external stakeholders, lenders in particular.
Bringing the Lenders Back to the Discussion Table
In certain restructuring cases, those that have gone into the bankruptcy process especially, debtors may find as they start initiating restructuring discussions that lenders have already started adopting an accelerated recovery or enforcement route.
Debtors and their advisors should assess how to dissuade lenders from taking this approach with the aim of bringing them back on the restructuring journey. This requires an understanding of the key drivers and legacy issues that potentially caused lenders to adopt this route, some of which are as follows:
Broader Lender Considerations
Lender committees
Lender committees have been quite beneficial to the restructuring process, particularly in large and complex cases. Based on our experience, these representative committees facilitate alignment with the broader lender group and render the communication process more efficient.
Furthermore, lender committees provide a platform for the supporting lenders to influence the process and drive constructive discussions.
Lender advisors
While debtor advisors are perceived to be the “honest brokers” on restructuring transactions, lenders are likely to engage their own advisors with a duty of care to the creditors in the more complex cases.
This will help alleviate the concerns that certain lenders may have and give them more comfort around the process, particularly in cases where the approval process within the bank may be somewhat bureaucratic.
Bridging the gap between lenders and shareholders
A common theme that comes up during restructuring discussions with lenders is that “shareholders are not sharing the pain.”
Lenders expect shareholders' commitment not to be purely restricted to business development, but to include some form of contribution to the restructuring plan – both monetary or in-kind, past and future.
In this respect, lenders need to assess their expectations in relation to shareholder contributions and the value they might be attributing to personal guarantees to the extent they have them.
The shareholders in turn would need to be forthcoming about their ability and willingness to make a monetary contribution to the extent they can.
It is critical that those expectations are addressed through an open and honest dialogue among shareholders and lenders.
Shareholders-Related Considerations, Particularly in Family Businesses
Understanding the restructuring process and governing laws
We have seen cases where shareholders mistakenly believe they can escape exposure under personal guarantees by declaring bankruptcy. Engaging with legal advisors and forming an adequate understanding of risk, liabilities, and rights under bankruptcy laws and company law is paramount in order for the shareholders to have the “right mindset” as they negotiate a restructuring deal with their lenders.
In that context, shareholders will need to evaluate the restructuring from the right lens, particularly when it comes to their expectations around what they can and cannot achieve from a restructuring process and how that compares to alternative options.
It is key for shareholders to recognise that typically in highly distressed and insolvent situations, the lenders are the real commercial owners of the business. This is important in order to set the tone around what restructuring terms may or may not be viable and where the shareholders’ equity ranks in the decision waterfall (both commercially and even legally under a liquidation scenario).
Having the above in mind can drive the right attitude and expectations from the shareholders on what they should aim to achieve from a restructuring versus their commitments to the process and the lenders.
Shareholder responsibilities
While shareholders usually play a vital role in building the legacy of their business, it has become common for them to be heavily involved in running the operations.
A key concern lenders have is around the extent of shareholders' involvement in day-to-day business operations and the framework that governs this involvement.
Empowering a management team that has adequate capabilities is increasingly becoming a prerequisite for lenders to support a restructuring and have trust in the process. This trust is reinvigorated when the right governance measures are in place, in order to allow transparent decision-making.
Shareholder commitment during the implementation phase
The shareholders’ engagement with the lenders and their commitment to contribute to the restructuring plan is key to a successful conclusion of a transaction. What is then required to sustain a restructuring during the implementation phase is delivering on these commitments.
These contributions take various forms and include asset or monetary contributions towards covering working capital funding requirements or fixing the capital structure, but also comprise support towards the revamp of the business. This may be in the form of investing in adequate managerial capabilities or setting up an adequate corporate governance framework surrounding operations, among other elements.
Conclusion
In summary, successful restructuring endeavours hinge on collaborative efforts, transparent communication, and proactive engagement from all stakeholders involved. By embracing these principles and navigating the complexities of a restructuring with diligence and foresight, organisations can emerge more resilient in the face of financial challenges.
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
