‘WHAT IT REALLY TAKES TO SURVIVE A CORPORATE BANKRUPTCY. Ni Pe cna : NATE erckeoi ican tment rants perilous Decree eG elcome eating iit epsravae VO orots1 alte ee ar ene Xe a acer oa cetelan centers) contemplate. ¢ That Meta SUS AOR CRI Coleced acts pee Reform: Act of 2005, which gives companies less time to reorganize and rid themselves of COIN cetera ye ments, trims the deadline for a company’s self:formulated rescue plan, and-makes it harder to retain key employees.Nervous lenders will likely push to recover debt fast, fearing that the organizations assets are losing luster daily. Second-lien holders, meanwhile, may angle to capture equity. ¢ Who needs the headache of overhauling a balance sheet and dealing with conflicts among creditor classes? There's just too much risk (and cost), some executives say, in trying to navigate through all that. The easier route? Sell the company to one of the many asset-hungry distressed-debt investors circling US. corporations, making it someone else's problem. Filing for Chapter 11 can even up the price by lowering the risk for the buyer. ‘There is another way. however, and that way isthe turnaround —a restructuring ‘othe business financially, operation ally, or both, that puts it the rose back to health. ff can be a long, hare journey. Some CFOs, in act, ‘would rather exit quietly and find 4 more stable situation than cun that gaunt ‘Tarnarounds are achievable Dut che odds are not great. OF the 450 large, public-company bank ruptcies from 1998 ¢0 2007, only about a thied ultimately exited a Chap- ter 11 intact and resumed life as a going “The bankruptcy laws do not give companies a fresh start ike they used to” says William Lenhact, national dlitector of estructuting services for BDO Consulting “And. the cost of bankruptcy can killa company. There are alot ‘of people looking over your shoulders—creditors’ repre: sentatives as well as financtal and legal advisers who cost money” “There is also the unfamiliarity ofthe terrain to considec ‘As Kenneth Buckfze, managing director of investment bank Miller Buckfire& Co..says,"Everything CFOs learned in bus: ‘ness school about finance doesnt apply ina restructuring ‘A company’ odds of success depend in part on whether it needs only «financial restructuring oF total operational ‘overhaol, says Jacen Dinofl, CEO of KCP Advisory Group." ‘company that has profit from operations but negative cash flow has a good chance of getting rd ofthe sins ofthe past if itean get the debt Inad refinanced’ Dino says. "But the big .get eng is the operational restructuringthats the one that requires crisis management skills” How can CFOs steer companies through such trials? Interviews with crsis-management experts, restructuring GA eve soe arouse tune - crscens advisers, and CFOs who have been throxgh the storm reveal « handfol of key steps that bet ter the odds of pulling a company back from the brink—an achievement that almost any CFO would be proud to have on his of her résumé. Given that businesscbankrapecy Slings in the frst quarter of 2008 rose 39 per- ‘cent over one year agp, 0 8713 (and 9 percent over the final quarter of 2007), this s advice that many CFOs need nove. And since many of these ‘aps essentially eectfy nancial and op- = a years before a Chapter 11 filing, they will help many other CFOs spot trouble in time to avoid 2 (Chapter 11 discussion at al, Avoid bankruptey— but not at all costs “Thre no doubt that bankruptey can be ong, har sog. Soltis, the $38 billon chemical-business spin-off of Monsant, spent four years, wo months, and 11 day in (Chapter 1 before exiting las February. Although the compa ny te reves 34 percent while under cour supervision, CFO tomes Sulivan had to le five amendments to the plan of reorganization as creditor cominttes battled far bigger place af the growing recovery. “lt was especilly frustrating foe me! Sliven says. “I thought the company was ready to come out in 2006. Then the credit markets cotaped infront ‘of ws" Sfuta had to sue its ext financiers to complete ts 52. billion emorgence financing Knowing that, companies often da anything to avoid bankruptcy, but Beware of taking extreme actions (00 lateJn the game. The time to perform business and operational adjustments i tthe fist sign of trouble, not when a defull ‘occurs, says Lenhart. During high-growth years inefficen ‘es creep into processes that can be quickly identifies to pore ‘costs, Lenhart says. What sit eally costing the company to deliver products and services, and what are customers pey~ ing for them? "You can always do something to reduce costs! echoes Charles F Kuoni I!] of CRG Partners Group LLC, a turnaround management fm, “Making that an everyday job ‘shox you stay out of trouble” Atthe same time, should debt-covenant defaults and ex: cessive delinquencies on payables be present, the CO should make every effort to avoid creating adversarial positions for key stakeholders. The CFO has to seek support by sharing information in good faith with senior lenders and critical creditors, says Dinoff The frequency of financial reporting, bas to rise exponentially. "You dont want the decision a ile bbankruptey tobe taken from you! Dinoft says, Sil the CFO has to know at what point t makes sense to ‘capitulate and live to fight another day under Chapter 11, Many executives desperate to avoid bankruptey wind up hollowing ‘out the bosiness by collateralizing ll the astets or selling the ‘company’s best assets to raise cash and extend the runway, says Buckfre. One common result: companies without assign- able collateral wind up paying exorbitant terms on debtor n= possession financing. "It takes tremendous discipline to not liquidate and say,"Welt work it out.” Buckfre sas, Explore the prepack" option In a “prepackaged? bankruptcy, creditors, bondholders, and other constituents agree 12 support plan of reorganization before the company fies with the courts Remy international Ic, was the third major US, auto supplier to file in 2007. It spent only 59 days in Chapter 12 (che average i sbout 16 months) But the debt laden company had spent months prior talking to bondholders, sy CFO Doug Laux. The fling allowed Remy to duce its long-term debt by $360 mil lion and then focus on ts operational vepae Lavxsaye Prepacks ate most appropiate fora straight balance sheet restractuing when company is forthe mos part, operationally Sound and current on rade agreements, sys Jonathan Carson, president of Kurtzman Carson Constants, claims and noticing agen servicing cor porate restructarers. Importantly, none of Remy’: ceetors tooka significant aicut in the recovery Lae sys which made the process ister. “The caveat is that prepacks can case issues with valua tion. Because the operational resteucturing comes after the reorganization agreement, the bankrupt entity’s valuation will be partly based on actions that haven't yet been taken, Lenfaet says. And that risk lowers the company’s valuation, -lving creditors that are swapping debt for equity, for exam ple, s larger share in the business Fix the business While in the weeks peor to fling Chapter 11 a smart CFO focuses on the analytical work of restructuring, oncea company les experts the priority has tobe fixing the business. “The CFO has to ‘mediately tat paring costs” to peeserve cash flow, says Kuoni of CRG tartoers, rho ha stepped into CFO roles in exis situations. "Ive been In stations where we had large equipment leases anc on the fst day of ling ejected them and sent the equipment back tothe owner he says ‘The cash-ow forecast “operates in realtime” and be- comes critical too inthis petiod, KCPS Dinoff says, “You Ave to know how much tine is left efor dhe company is completely out of funds. You want to get from tat exsis stage to tabilization que}? While stering New York-based St. Vincents Catholic ‘Medical Ceoter through Chapter 11 in 2006. CFO Martin ‘McGhan fought mmedsteyto preserve liquidity and cool $10 milion per month cash bur atthe 600- physician hos pital. "We hed a sheinkuing number of beds os well as reve ‘enue and collection problems says McGahan, a managing dliectorat turnaround advisory Alvarez & Marsal MeGahan ceaunted te location ofthe large erica celles; deter- mind the pioly of payables: and sought to minimize spending in other areas, sich asthe hiring of constants. “As you track cash it ex poses alt of the broken processes Inherent im the system that leads toa teal tactical sesponse? Me- Gahan says. ‘Within a tue wore than a sont of Sivan coming on board t Solita, the company had instituted price inereases ‘on somo the plastics it man- facture, sed its acrylics- bets busines, and forme tear to build market share inthe Far East. "We needed to demonstrate to financial nstiations that we could stop the bleeding? Sullivan say. Long term, while stillin Chapter 1, the company was able to invest eash into opening 2 new plant in Chinato bulld Salles, a special ype of protective las.Mastving te Turtond Similaely, Dana Corp. focused on “s massive chili tion of its business-cash flows and income statements and not just balance: sheet fix says attorney Corinne Ball leader ‘of the bankruptcy practice at Jones Day, which advised the aute-parts maker. The changes played no seal! part in Dana's attracting a $790 milion prefered -equity investment led by CCenterbridge Capital Partners anda 82.1 bilion debe Financ Ing to exit Chapter 11 Talk it out ‘When a company is in bankruptcy it is natural, for employees—and the company as a whole— tolower their heads and cease communicating ‘But the opposite is required. Within days, if not on the first day; management has to setup erass-funetional commani- cations to break dovn the sls, says MeGahan. “Operations has to know who to callin finance i there aze no supplies fm the shelf, anc marketing has to know the strategy rom the nance and operational perspective he says. Employees “need to have operating guidelines, They cant sit in crisis mode for 90 days? Dinoff says ‘Comanunication to the outside world has to be assigned to the right personnel. The CFO ‘may be the one who bas ta call the credit ‘manager ofthe company’ largest sp- plier, explain the rescue plan, and negotiate the terms on which the ‘ersdor will start supplying prod- uct, he says, The ain: to demon strate that the business will con Linuo to exist and creditors won't get burned. Bankeuptcy isa publi forum, ‘explains List Donahue, co-head of the mrnaround and restructuring practice at AliePartners and the CFO ‘of energy supplier Calpine, which went through a contentious two-year reorganina- ‘ion before exiting last February. “Sharing as much information as possible with creditors makes the process asin she explains, At Calpine, which filed with $18 billion in debt and operating losses, Donabue and her team set up weekly conference calls with al ereditor committe so they s Employees could review power-plant sales proposed by management and ask questions. “Make it a ordedy and consistent as pos sible, and have an agenda’ Donahue suggests Seek the greatest good Iepaysto play ballin bankruptcy “atleast when iceomesto cing in creitorelssesand max imlaing thee recovery. With companies now having just 180 days to le het own reorganization Plan, Calpine fle che time pressure, Donahue sys. But because the company coordinated very closely with constituents i aval to overcome that hirdle—the technical expiration of the" period of exclusivity” deadline passed with litle notice. And before all was st and done, Calpine was also able to get the best del for credors— general unsecureds recovered. 85 percent or more ad equity holders received warrants to parchase new common stock. I dont belive adversarial cho best proach to resructarg Domaine sy. At Soli, as one ois ist tps Sulvan rove te com pany’ fined beneft pln, which was underfunded by $00 nil. Bucnstead of tchig pensioner altogether and ley ing ther tothe Pension Benefit Guaranty Corp, the com any tapped its debt in-possessonfancing to dnjet $300 millon into the plan "We needed the support ofthe people in the pension plan,’ Sullivan explains. “And there would Tvebeen another cai agaist the es tater woul have ltd recoveries, so bondholders backed it” The prevalence of istresed asset investors holding corporate debt, a common occurrence of late, actually resents a adaitage in this context. Some ofthese investors tend to look at 2 eke stake ax an equity investment, so hey may be happy with 80 cents on the dali ifthey bought the debt ata lower pric. “That con potently leave some value or cash for creditors further dawn the priority waterfall says BDO Consulting’ Lenhart. They dont have ti home ran on all hse dese points out, Likewise sen oten amenable to “gve-ups’ “Pigs get fat, hops et slaugh- teted” CRGS Kuon sa, Frs-ien lenders recognize that Tenders are ‘heed to have Operating guidelines. They cant sit in CYISIS MOE for 90 days” says KCPs Dinoftwe 7 a Lhe CFO nastobethearbiter a of what's best for the company—from both a feasibility anda longevity perspective,” says Calpine’s Donahue. they wipe out equity 109 percent, they willlose the coopera tion of equity ina reorganization process, possibly Ieading to a pure liquidation, he explains Fight for flexible capital For many companies, cverweight capa src tutes can cause a cycle of bankruptcies, soit snakes sense cat the lst plee of aie is thi bl serviceable balance sheet during and afer a reorga- nization, “The coptlstrucare has line up with your tte” says McGahan. Wihin eo months of joining St. Vincents, Mosihan a negated thane lender take ot thee tire debt structure. The company pal of eight diferent bonds and evolving cred cles with singl-trn facity that itcould hawk valuable realestate oF use it 8 ne collateral “otherwise, we would have ned consent from the iferent bondolder groups for thease sales? McGahan sys. Tn Remy Internationals ease, debtor possesion and cat financing were negotiated simultaneously. Remy didnt tare tote on onerous covenants, ab many Chapter 1 flere do, to get $630 milion in financing from lead lender Barclays Capital and others, eve thou i exited daring the cet crunch That was because new capital come in behing the fa lity, CFO Lau sys, nthe form of $85 milion of pefersed shares. And the new capital ad a paymentin-kind feature in care eash got spree again, imulatty, Calpe’ ext fcleyinckaded an aecocdlon feature that allowed leverage to increase a the company’s discretion. Corporat-lve debt could expand to rfmance tnore-expeniv prnject-levl debt use by some of Calpine individual powerplants, CFO Donahue sys. “The CEO has to be the asbterof whats best fr the company-from both a feasibility anda longevity perspec: tive? Donahue ays about ash capital in bankrupt. “The cata structure hast havea plate fo growth Growth n fact, might be thought fas thelight tthe end ofthe tunnel, Entering bankruptcy, CFOs could be forgiven for thinking they are heading tvard that other Kind of ht, brat chat ned not be the case, You can, att things around. ero \VINCENE RYAN /MINCERVANECFO.COMD IS & SENIOR EDITOR 68 cro seus neuer san - cro.com IN THE CURRENT CAPITAL markets, CFOs hoping to _avoid the “distressed label ‘and having theichand forced brave to defend against inves tors in distassed assets, Dis- {ress investors may be looking, ‘to "loan to ovin,” whether boy negotiation or by forcing business into Chapter , says attorney Cerinne Ball, leader ofthe bankruptcy practice a Jones Day. The distressed investing industry's incredibly well organized, well capitalized, and well eoresented, says Ball, who advised Dans Corp. on its Chapter‘ lng in 2006 “They investin your securities because they think the company is undervalued, but the bad newsis they want torealize that value on thee investment, not the equity,” Ball says, They're waitingfor an ever [lee a proposed asset sale or atechnical covenant default] that brings them Into voice" Oneo the issues that pushed energy supplier Calpine into bankruptcy two years ago was alavsuit by bondholders that prohibited the company form using eqrgmilon of proceeds from domestic gas ascet sales ‘well-prepared CFOs havea detailed knowledge of theircompany’s existing and expected compliance withthe covenant and default provisions of alldabts in the capital structure, Bal says. They also know the timing and extent cof eross-default sues upon an “asserted” default. OF course, knowing the identity ofthe company’s debt- hholdersis critical, so much so that gaining same control ‘over who can own the company’s debt and trade it, by obtaining “consent rights” in lording agreoments, may be worth anincreased cost in exchange forthe certainty Don't assume financings readily available, that a "misguided orincorrect” assertion ofa default or even acceleration is harmless, or that lender wil waive a violation, Ball ays ‘And fa committee of debtholders knocks atthe door or fires off futtve etter to the board, engage them, dont slam the door, "Don't picka light you can’ afford to lose.” sheadds, —¥R,