Communicating challenges when restructuring

27th April 2020

The UK’s exploration of a new ‘light touch’ US Chapter-11 style insolvency adds new questions for companies and management teams facing these situations. Management teams are very much in the crosshairs since under the new light touch approach the existing team stay in situ, albeit overseen by an insolvency practitioner.

As with any restructuring, maintaining open communication channels does much to reassure all major stakeholders as the business navigates dangerous, uncharted waters. Few management teams will have direct past experience of the situation. They are now seeking to achieve a least bad outcome, and stakeholders are more prepared to support management as long as they can see the logic for what is being done in their name.

It is sobering to see that the impact of COVID-19 added to an already powerful trend for restructurings. Research from Deloitte shows that there were 67 retail company voluntary arrangements (CVAs) in 2018 and 2019, as many distressed companies faced testing times and sought to address their balance sheets and reset strategies.

In most cases those turnaround strategies are now being stress-tested way beyond previous expectations. While the decision making on a restructuring is well considered, the timing and execution is often fast paced, with the news reporting on these decisions equally rapid. Therefore, preparation is important to ensure a business communicates effectively.

Even though the news and political agenda seems to be racing, there is still an opportunity for your voice to be heard – and it starts with open and honest communications. Restructuring processes can be complex and dictated by legislation and process. A common mistake companies make is they don’t explain the situation in sufficient detail, leaving stakeholders confused and questioning their motives and the rationale behind the need for a restructuring. This detracts from the overall process. The vital need for a restructuring to be successful is the understanding and backing of key stakeholders, and in the wider context of the long-term objectives. These objectives will invariably evolve over time, which is why it is important that companies listen to their stakeholders from the outset.

Restructurings typically involve the downsizing of a company, whether this is operational, impacted divisions or employees, or physical such as offices, factories, or shops. One key takeaway to come from the retail CVAs in early 2019 was that the creditors are not content with being dictated to on the terms of engagement. Too often, they are involved at the last minute with the case for change being presented with very little option other than to accept or decline. In this case, it was the landlords that faced successive CVAs and stood to lose significant rental income. In fact, the CVAs put further strain on the already precarious position that one major landlord, Intu Properties was facing. Intu has been the subject of ongoing attempts to restructure over the last six months, so far to no avail.

Listening to your stakeholders such as suppliers and other creditors, many of whom may be undergoing similar struggles and balance sheet pressures, is crucial in being able to lay the foundations for a successful restructuring. A conversation inviting feedback and a willingness to concede helps smooth the path for a consensual restructuring. No one side should be perceived to have an upper hand and all parties should be prepared to make concessions. There must be a clear strategy in place for the company post restructuring; a company cannot reasonably be expected to carry on operating as it was before without a change in the strategy and outlook – the creditors simply will not allow it.

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