Restructuring: When the “Chief Restructuring Officer” comes – A field report

What does an experienced “Chief Restructuring Officer” do when he takes over the restructuring of a distressed company?

A Chief Restructuring Officer, also known as “CRO”, is often the last chance for companies in crisis situations to avoid insolvency or liquidation. Currently, many companies and their business models are in an existential crisis due to the economic effects of the COVID-19 pandemic.

In such a liquidity crisis 83% of the entrepreneurs would use the support of an external Chief Restructuring Officer, according to a current survey of the University for Economy and Environment Nürtingen-Geislingen.

What is the work and role of these interim managers and experts for difficult restructuring situations in practice?

The first day of restructuring

For an experienced Chief Restructuring Officer (CRO), it is a familiar situation, yet it is always a challenge: In the first few days of work, the CRO must first introduce himself personally to the managers, the works council and then, at a company-wide staff meeting, to all the employees present in the distressed company and win the trust and acceptance of all those involved.

With this introduction, you don’t have a second chance to make a good first impression. On the one hand, the CRO’s short speech must win over the management and employees for unconditional support and their trust, while motivating and convincing them that the forthcoming restructuring measures under his leadership will be successful.

At the same time, the CRO must make it clear with unsparing openness that the planned restructuring work will be very painful for everyone involved – including the employees – but without any alternatives.

Just as important as winning the acceptance and trust of the employees in the company is the buy-in from the other stakeholders and for restructuring measures. The company’s most important stakeholders include shareholders, banks and other financing partners, trade credit insurers, supervisory or advisory boards, unions, works councils, and strategic customers and suppliers.

Definition of “Chief Restructuring Officer

The Chief Restructuring Officer (“CRO”) is an interim managing director or board member who is supposed to lead companies out of an existential liquidity and earnings crisis by managing and implementing the restructuring process and coordinating the stakeholders in order to avert insolvency or liquidation of the company.

Restructuring: The first weeks

In the next four to six weeks at the most, the CRO has three central tasks that he has to fulfill.

The first step is to prepare reliable liquidity planning and ensure the company’s short-term liquidity.

At the same time, the CRO must draw up a restructuring plan that describes a short-term turnaround and the associated concrete restructuring measures, and quantifies the restructuring costs and effects in detail. If a reorganization report according to IDW S6 is already available, an experienced CRO will validate the quantitative targets set out therein and develop concrete operational implementation measures.

The sustainability of the crisis company’s business model must also be critically examined, otherwise the restructuring costs and measures would not be meaningful.

Finally, the CRO has to negotiate with stakeholders, i.e. in particular shareholders, credit institutions and other financing partners, works councils and employees about their contribution to the restructuring and coordinate the restructuring process.

Restructuring: Stringency and social competence

For the CRO, it is important not only to apply the necessary stringency in the implementation of the restructuring, but also to use his social skills to win the support of the stakeholders for his measures.

To ensure efficient communication and timely adoption of decisions, it is advisable to set up a steering committee for the restructuring process, which includes representatives of the shareholders and, in the case of leveraged companies, the financial institutions.

The general rule is: There is not too much communication during restructuring for a CRO. Communication includes regular steering committee meetings and a “24-hour hotline” for the bank pool. It is better to have all the relevant financial figures and information at hand.

But a high level of presence in the offices, the factory halls with the workers at the machines, staff meetings, meetings with the works council or the weekly management meetings are also crucial for the acceptance and thus the success of a CRO.

The importance of successes and symbols for successful restructuring

An experienced CRO also knows how important quick wins are.

Quick wins include verifiable and measurable success in securing liquidity, e.g. through immediate measures such as freezing capital expenditure, working capital management (negotiating new payment terms with suppliers and customers), labor cost savings through short-time work and (temporary) wage waivers as employee contributions or the termination of temporary workers.

At the same time, all immediate measures for short-term cost reduction in material costs, other operating expenses or personnel costs must be implemented as liquidity preserving as possible.

In addition to the quick wins, it is necessary to exemplify the new corporate culture in the crisis situation. The CRO will lose his credibility if he drives up in a private luxury car or an expensive rental car and stays overnight in an elegant hotel in the larger neighboring city. Experienced CROs always rent a modest vehicle, do without the elegant tailor-made suit and are satisfied with a modest hotel or pension room near the company.

If only commercial workers or “small” employees, but no managers are on the restructuring list for staff reduction, it will be difficult to win the support of the works council for the new course.

Subletting of vacant rental or office space after staff reduction is also a visible sign to all employees that the company is in a state of change and upheaval and that a new corporate culture is in place.

Typical restructurings in which a Chief Restructuring Officer is appointed

• Imminent or acute liquidity crisis of the company
• Imminent or acute over-indebtedness of the company
• Breach of covenants, i.e. the serious and possibly permanent violation of defined target values for key figures, which is necessary to maintain the agreed debt financing with the lenders
• Conflicts between shareholders or between stakeholders in the face of an impending earnings or liquidity crisis
• Lack of trust of the financing banks or other financing partners (bond holder, mezzanine donors, trade credit insurances, factoring companies, etc.) in the management and/or shareholders of the distressed company
• Sustained, increasing operating losses of the company with a management inexperienced in crisis situations

Restructuring with the right team

In complex restructuring situations, it has proven to be a good idea to establish a so-called liquidity manager and a program manager in addition to the CRO.

Especially bank pools, which unfortunately do not always agree among themselves on the necessary measures and financial support, require a high degree of attention and time.

A CRO who first has to implement restructuring measures will greatly appreciate the support of a liquidity manager who has experience in dealing with banks in restructuring situations.

The liquidity manager is an important interface to the banks in the number one restructuring issue – safeguarding liquidity, increasing transparency and restoring lenders’ confidence.

If numerous restructuring projects – more than 20 projects are not uncommon here – have to be implemented simultaneously with high priority, a program manager is absolutely critical for the successful restructuring and the CRO.

The Program Officer supports the definition of objectives, deadlines and responsibilities for all restructuring projects and monitors the progress of the restructuring in terms of both quantity and content.

If the CRO, liquidity manager and program officer have already worked together successfully in other restructuring situations, this is an invaluable advantage for the speed of implementation of the measures and for the ability to break the mental downward spiral in the distressed company.

The end of the restructuring process

A CRO is always a crisis manager and temporary reorganizer. Good restructurers are often the ones who are not the right managers after the company has successfully overcome the crisis after 9 to a maximum of 18 months and it is all about continuous development in day-to-day business.

A CRO is a specialist for the special situation restructuring, not for managing and leading a functioning and successful company.

After a few months, a CRO and the company’s management team should have defined a strategy with clear goals for the period after restructuring and have developed and communicated a sustainable, often new or at least more focused and efficient business model to motivate employees to stay with the company with this vision for the future.

The last step of the CRO’s work is often the support of the shareholders and relevant stakeholders in the selection and training of his own successor, even if he is removing himself from the company – quasi as the last restructuring measure.