Never waste a good crisis: critical success factors for the chief restructuring officer
March 2015 | SPECIAL REPORT: GLOBAL RESTRUCTURING & INSOLVENCY
Financier Worldwide Magazine
The Chief Restructuring Officer (CRO) is increasingly seen as an important position in companies faced with the need to implement processes of change, especially those of an urgent nature. The CRO concept that started in America has moved to Europe over the last decade. Since the crisis hit Western Europe hard, we found that many business leaders were struggling to change the business or to lead a large restructuring.
In situations where companies face pressure on profitability and budgets, often leading to increasing losses with limited cash resources, business leaders find themselves in a difficult position. The ability to bring a structured approach to stabilise the business and provide transparency to stakeholders (let alone drive a consensus among stakeholders about the direction of the restructuring) is rarely found in the company. This is simply because incumbent management teams lack the experience of a distressed situation characterised by pressure from creditors and interference from lenders.
To end the negative spiral of a distressed business, a restructuring is necessary to slim down the company and enable it to once more add value in the markets in which it operates. This calls for a radical process of change that often starts with a credible restructuring plan. The CRO drives this process and complements the management board by adding essential competencies to it. This article examines the critical success factors for the CRO based on three key issues: What skills does the CRO need to embody? What is the position of the CRO within the company? What are the core tasks of the CRO?
This article has been based on a series of interviews with various CROs, bankers, lawyers and ‘distressed’ investors.
The skills required of a CRO
First and foremost, the CRO is someone with broad operational experience as an executive in a large sized company who has experience of driving a restructuring process. This experience and seniority is essential to create credibility and therefore buy-in on the part of the various parties involved. Ultimately, the success of a restructuring process depends on whether a large group of stakeholders (often with opposing interests and emotions) can be brought into line. In this respect, the CRO is a true leader who goes in search of solutions and who, in the context of the restructuring, attempts to convince the necessary players of the merits of a specific plan of action.
Restructuring processes often involve all divisions of the company and the CRO is therefore someone who has experience and knowledge of various disciplines.
A thorough grounding in finance and an understanding of information systems and processes are also important. Many companies, and especially those facing financial challenges, have only a limited overview of how cashflow is likely to develop in the short to medium term. This information is essential to guide the company effectively, especially in the early stages of a restructuring process. In addition, the CRO should have experience with banks and good knowledge of credit processes and documentation. When companies face financial pressure, banks are the most important and dominant stakeholder. An understanding of the banks’ position is essential if the restructuring is to be a success. Experience of divestment processes is also important, since hiving off company divisions often serves as a useful way of achieving a restructured and slimmed-down core company and releasing cash resources to pay off debts or to invest. Finally, the CRO must have a strong personality and the courage to make difficult decisions, together with an understanding of the emotional environment in which a restructuring often takes place.
The position of the CRO
The CRO is appointed by the company in consultation with its lenders. Banks play an important role in this, but hardly ever enforce this position or the deployment of a particular individual. This is because the business itself needs to understand the need for change and therefore to also take responsibility for it. The CRO is part of the management board in accordance with the articles of association, ensuring he or she has formal access to all of the information and decision-making bodies within the company. The CRO stands alongside the CEO and focuses primarily on short-term financial stability and the drafting and implementation of a restructuring plan while the CEO monitors the long-term strategy and relationship with customers, suppliers and employees. In this context, the existing financial director or CFO has a more limited role to play, focusing on reporting and accounting. After the company has been stabilised and the restructuring plan is more or less completed, there will once again be room for a traditional CFO. This also means that the CRO is a position of limited duration, solely focused on stabilisation and bringing change. As a result, the CRO does not represent a threat to the management board, which will remain committed to the company for the long haul. This is often a major reason behind the successful delivery of the plan.
The duties of the CRO
Before the CRO starts work, it is important to gain an initial understanding of the challenges and potential solutions, together with the position of the various stakeholders, and above all to ascertain whether he or she is the right person for the job. This process often takes place in a short space of time, based on discussions with the parties involved. Once appointed, the first and most important duty of the CRO is to stabilise the company to create an environment in which a restructuring plan can be drawn up and implemented. This often starts with the compilation of cash flow projections for the next 13 weeks. This provides information concerning all receipts and payments over this period. It also reveals any options to delay certain payments and accelerate incoming funds to finance the company in the short term. For this, the CRO also has control of all payments made from the moment he or she is appointed. In the initial phase, the CRO also investigates whether certain divisions or company assets can be sold off in the short term or offered to lenders as additional collateral. During this phase, it is important for the CRO to have a good overview of the financial situation and current position with regard to collateral. This initial investigation enables the CRO to make preliminary agreements with lenders and other stakeholders. This may involve a standstill, temporary deferment of interest payments and other repayments, and possibly also additional finance.
After the company is stabilised, the CRO resumes or starts work on compiling the restructuring plan. In it, key questions that must be answered include: Which company divisions or assets are relevant in the markets in which the company operates and provides added value? Which divisions or assets should be closed or sold because they add no value or because other parties could add greater value? This is especially true for companies that have run into financial distress as a result of a long-term questionable business model (like an offline retail, real estate or traditional printing business). Here, the first question to answer is: What should a longer term, sustainable business model look like? The second is: How should an operational and financial restructuring (both are interlinked) be planned to achieve the desired longer term sustainable situation? To some extent, adding value is an abstract concept, but in the context of a restructuring process it can be seen as the extent to which a contribution is made, by the various company divisions, to the repayment of loans and the inherent risks. Again, understanding developments in cash flow in the medium to long term is essential and forms the basis of the restructuring plan.
The CRO will often work with external consultants and advisers in order to obtain a stable and reliable (financial) information base and understanding of short- and medium-term cash flows. These also ensure that the plan has the necessary creditworthiness. While drafting the restructuring plan, the CRO maintains frequent contact with various stakeholders. Stakeholders are offered an opportunity to provide input for parts of the plan during this process to ensure they buy into it.
A contingency plan is another important part of this process. This not only proves useful in answering the question of what happens if it goes wrong, but also provides an understanding of the value at stake for the various stakeholders. Based on this, the CRO can conduct negotiations and ask stakeholders to make a contribution to the ultimate restructuring plan. The contingency plan also serves as a fall-back plan if the restructuring cannot be implemented in a solvent environment. Once the company has been stabilised, the key stakeholders have accepted the restructuring plan, and the company implements the desired steps of the plan (thereby achieving important results), the CRO has fulfilled his or her goal and the position is discontinued.
Companies often delay the appointment of a CRO for too long. Issues may have remained unacknowledged or been underestimated and the appointment of a CRO is seen as a sign of weakness.
This is a missed opportunity. The sooner a CRO is appointed, the more options are available and the greater the likelihood of success. The CRO is involved with the company for a short time only. He or she helps to break the negative spiral, regain control of the company and ensure that value is once more being created. His or her specific qualities and skills are essential in this. Never waste a good crisis.
Rick van Dommelen and Edwin van Wijngaarden are partners and Rob V Jansen is a senior manager at PwC. Mr van Dommelen can be contacted on +31 651 607 076 or by email: firstname.lastname@example.org. Mr van Wijngaarden can be contacted on +31 654 624 309 or by email: email@example.com. Mr Jansen can be contacted on +31 653 867 109 or by email: firstname.lastname@example.org.
© Financier Worldwide
Rick van Dommelen, Edwin van Wijngaarden and Rob V Jansen