Navigating Complex Debt Restructurings: How to Build Consensus Among Diverse Stakeholders
Understanding Key Players in a Restructuring
The key players in a corporate debt restructuring include both internal and external stakeholders:
- Equity Owners – Shareholders and investors who own equity in the distressed company. They are typically wiped out or significantly diluted in a restructuring but seek to retain some value or potential upside.
- Secured Lenders – Banks and bondholders with collateral backing their debt. They will push for repayment of their loans and want to avoid any impairment of their collateral.
- Unsecured Creditors – Bondholders, suppliers, vendors and other parties owed money without collateral backing. They face potential significant losses and will advocate for better recoveries.
- Employees – The company’s employees have an interest in preserving jobs and ensuring continuity of operations. Key executives also want to retain control.
- Customers – Important customers carry leverage as the company seeks to stabilize revenues. They want assurance that the business will operate without disruption.
- Pension Beneficiaries – Individuals dependent on the company’s retirement plans have an interest in protecting their benefits.
- Management – Existing managers want to hold onto their jobs while creditors will seek accountability for the company’s financial distress.
- Government Entities – May have regulatory oversight and interest in preserving jobs, pensions, etc.
Overcoming Competing Priorities
With so many parties and priorities involved, consensus may seem impossible. However, stakeholders can rally around a shared goal of maximizing the value of the reorganized business.
The debtor company has the most pressing interest in building consensus to ensure a successful restructuring. To bring parties together, management can focus negotiations around a new sustainable business plan that appropriately allocates risk and reward.
Specific strategies to build consensus include:
- Shared Information – Transparency around the company’s finances, operations and projections helps align assumptions and expectations. Information should be shared equally with all key parties.
- Compromise – Stakeholders must be willing to give up something to reach agreement. Priorities will conflict but everyone stands to lose without a deal.
- Fair Treatment – Disparate classes of creditors and interest holders should be treated equitably based on their respective priorities and collateral positions.
- Independent Assessment – Third party valuation and solvency opinions build confidence around the proposed treatment of claims.
- Legal Options – Understanding all available legal tools under the bankruptcy code or out-of-court restructuring frameworks.
- Timely Decisions – Dragging out negotiations raises risks and costs. Decisive milestones push parties to decide on reasonable options.
Building Creditor Consensus
Gaining support across classes of creditors is critical to meeting voting thresholds required under the bankruptcy code. A dissenting class of creditors can derail a restructuring plan so debtor companies must address key areas of creditor concern.
Collateral Values – Secured creditors will scrutinize collateral appraisals and projections to ensure adequate protection against losses. Defensible valuations of assets backstopping loans build lender confidence.
Cash Needs – Lenders want to know their debt will be serviced per the negotiated terms. Detailed cash flow forecasts validating liquidity to operate post-restructuring provides comfort.
Growth Prospects – Creditors look for upside potential in the reorganized equity to offset any compromised debt claims. Convincing business plans signal viability.
Management Changes – New supervision instills creditor confidence in corporate governance and oversight of future performance.
Lenders vote based on financial recovery prospects more than other priorities. A sustainable balance sheet and strong business outlook eases creditor dissent over impaired loan repayments.
Overcoming Employee Resistance
Employees will fear job losses from cost cuts or business unit closures. Their support hinges on clear communications and treatment once concessions have been made:
- Severance & Retention – Fair severance policies if job eliminations are unavoidable along with retention plans for employees staying through the restructuring.
- Benefits – Minimal disruption to health care, retirement and other employee benefits.
- Development – Continued training and growth opportunities to retain talent and morale.
- Participation – Incentive plans allowing employees to share in equity upside.
Restructuring advisors can convey how employees stand to benefit from a stronger company able to reinvest in jobs and growth once legacy liabilities are addressed.
Customers Just Want Continuity
Customers need to know supply relationships and business operations will be uninterrupted through any financial reorganization. Debtors can offer safeguards like:
- Vendor Financing – Providing critical supply chain partners with financing support.
- Service Commitments – Documenting support continuity and responsibilities via contract.
- Executive Access – Direct engagement between customers and management.
- References – Discussions with representatives from prior restructurings.
Building Consensus Through Compromise
While parties may seem entrenched in their positions, restructuring veterans emphasize that holders can be brought along through incremental compromise. With so much to lose absent an agreement, stakeholders can get to “yes” one concession at a time.
- Pre-negotiation – Separate talks to understand must-have items for each party.
- Framework First – Agreement on key terms before resolving technical details.
- Problem Solving – Jointly overcoming issues like information gaps, mistrust, and misaligned assumptions.
- Deadlines – Use binding timelines to force decisions before alternatives deteriorate.
- Mediation – Facilitated negotiation through an impartial third party when talks stall.
- Alternatives – In a bankruptcy, the “best alternative” options like a section 363 sale or liquidation establish the parameters for a consensual deal.
Getting to Yes When Stakes Are High
While challenging, consensus building remains imperative to avoiding value destruction and achieving a successful balance sheet restructuring. With so much on the line, financial distress creates opportunity for stakeholders to put aside competing interests, compromise, and work jointly towards a shared goal of maximizing value. There exists a solution where everyone can get to yes.
For further reading on navigating complex restructurings, check out the following resources: