Informal Creditor Workout

When an underperforming company either fails to detect the early warning signs or is unable to halt the downward trend,  the business becomes distressed.  This initial phase of distress is called an Informal Creditor Workout and / or a Restructuring because the organization’s survival depends on its ability to work out its financial problems and restructure its capital structure, especially debt. 

If the answer is Yes to both of the Key Questions on the graphic, above, that is,

• the cash flow from operations (CFFO) does exceed operating costs, and
• the company passes the Viability Tests -- at least one core business exists, adequate bridge financing is available, and the right team --  including a turnaround professional – is on board,

then the possibility of success exists. But the costs will be high in more ways than one: 

• the firm’s management and directors lose their leverage over creditors and suppliers;
• members of the senior management team may lose their jobs; and,
• in exchange for restructuring the loans, creditors may demand substantial fees, higher interest, and potentially substantial equity, thus diluting current stockholders. 

If the answer is No to one or both of the Key Questions, begin triage:

• reduce debt;
• manage cash; and
• attempt to achieve breakeven by eliminating unnecessary costs.

To improve the odds of a successful restructuring, bring in a turnaround manager and give her the authority to act as the Chief Restructuring Officer, “CRO”, to renegotiate debts. Creditors can be more flexible knowing that a skilled professional is in place to protect the corporation's assets. 

Other key factors that improve the odds of survival are:

• Conserve cash and secure the assets that will be necessary to go forward.
• Promptly and rigorously identify assets whose return on capital is less than the firm’s cost of capital, and divest those assets.  Once these assets are shed, the remaining cash and the core assets may allow a return to positive cash flow. 

It will become evident relatively quickly whether the crisis will be resolved and the business turned around.  If the forecast is unfavorable, carefully evaluate the options with the turnaround manager and a bankruptcy attorney.