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September 11, 2017


 

A Brief History of the Chief Restructuring Officer

The role of a Chief Restructuring Officer (“CRO”) is approximately four decades old.  While still a somewhat new role in the 1990s, CROs are now ubiquitous in the restructuring community.  Todd Zywicki, a George Mason law professor who specializes in bankruptcy law, traces the origin of the CRO to the Bankruptcy Reform Act of 1978 (the “1978 Act”).[ii]  The 1978 Act created “a unified reorganization chapter [Chapter 11] that is fundamentally grounded in the presumption that pre-bankruptcy management will continue to operate the business following the filing of a petition for relief.”[iii]  The bankruptcy process became “more of a business tool as opposed to a disgrace; more of a business strategy as opposed to a confession of abject failure.”[iv]  In general, the 1978 Act made it easier for businesses to file for bankruptcy and reorganize.  Prior to the 1978 Act, total filings under Chapter X, XI and XII averaged about 1,250 per year between 1940 and 1978.[v]  In the 30 years following October 1979 (the effective date of the 1978 Act), roughly 14,000 Chapter 11 cases have been filed each year.[vi]  Fortunately for aspiring CROs, pre-bankruptcy management teams generally lack the restructuring expertise, resources, or credibility necessary to effectuate a successful reorganization.  Thus, the CRO role was born and is now commonplace in the restructuring community’s lexicon.

 

When to Hire a CRO

CROs are retained for a myriad of reasons, in many different types of situations (out-of-court or in chapter 11), and at various stages of a restructuring.  The following is a non-exhaustive list highlighting a few reasons to retain a CRO.

  • Restructuring Expertise & Experience:  A CRO can add restructuring expertise and experience to a senior management team unfamiliar with Chapter 11 or navigating an out-of-court restructuring.  In times of distress, the company has one chance not to fail.  A CRO will provide the confidence and leadership which comes from years of experience managing in the frenetic environment associated with distress.
  • Resource Management:  A CRO (and their team) can supplement an overburdened management team or a business lacking adequate resources to manage a restructuring or Chapter 11 process.  Appointment of a CRO focused on managing the balance sheet allows the existing management team to focus on the day-to-day operations of the business.
  • Credibility:  A CRO is typically appointed due to a lack of trust or a breakdown in communication between the senior management team and the company’s stakeholders.  Retention of a CRO can rekindle strained relationships between management and company stakeholders (including employees, vendors, customers, lenders and equity holders).
  • Management Malaise:  A CRO is oftentimes retained to execute or implement a business decision facing opposition from the incumbent management team, the company’s workforce or other stakeholders.  A CRO can help drive change by building consensus among stakeholders.  A CRO is disposed to act fast.
  • Independent Oversight:  A CRO can provide an objective view of the existing management team.  In addition, a CRO can be a watchful eye for stakeholders.

Due to the reasons highlighted above, CROs remain predominantly forced hires (by lenders).

Roles & Responsibilities

A CRO is a member of the senior management team and typically reports to the Chief Executive Officer or directly to the Board of Directors.  Given each out-of-court restructuring or Chapter 11 case comes with its own unique set of challenges, a CRO’s roles and responsibilities are case specific.  They can be broad or narrow and include powers that are extensive or limited.  As such, today’s CRO needs a diverse, well-rounded skill set.  In addition to financial and restructuring expertise, it is important for today’s CRO to think strategically (like a CEO), have operational experience (like a COO), and be adept at stakeholder management (consensus building and negotiations).

While a CRO’s roles and responsibilities are case specific, below is a summary of a few of those strategic and tactical responsibilities.

  • Cash Management – What are the company’s current cash and liquidity positions?  Based on the thirteen-week cash flow forecast, is the company burning cash and liquidity throughout the forecast period?  Cash is indeed king.
  • Cash Enhancement (Profit Improvement) Initiatives – Identify financial and operational opportunities for the distressed company to save cash (mitigate or eliminate the company’s monthly cash burn) or improve profit.
  • Raise Capital (if needed) – Identify and negotiate with providers of debt and/or equity capital.
  • Stakeholder Management – Manage communications, information, and negotiations with all stakeholders, including employees, secured lenders, unsecured creditors (vendors, landlords, noteholders, et al.), equity/member interest holders, various official or ad hoc committees, and the U.S. Trustee’s office if in Chapter 11.  Develop a coherent and consistent message for stakeholder communications – that is shared and approved by senior management – adds credibility to the process.
    • Senior Lenders – Negotiate forbearance agreements and waivers as well as restructuring support agreements/plans with senior lenders.
    • Employees/Team Members – Keep them informed of the company’s plans to restructure.  In times of distress, people react differently.  Most people would prefer to hear bad news rather than no news at all.
    • Vendors – Negotiate with suppliers to assure continued support through the restructuring process.
    • Landlords – Negotiate with landlords to assure continued support while balancing the need for rent concessions and unexpired lease terminations.
    • Customers – Keep them informed of the company’s plans to restructure.
    • Equity/Member Interest Holders – Keep them informed of the company’s plans to restructure (note that their interests might not be aligned with creditors).
    • Official or Ad Hoc Committees (Creditor or Equity Holders Committees) – Negotiate with and keep them informed of the company’s plans to reorganize as needed throughout the Chapter 11 process.  Their support will likely be key to confirm a Plan of Reorganization in addition to effectuating a successful restructuring post-emergence from Chapter 11.
    • Plan of Reorganization (if viable) – Develop a strategy and plan to restructure the company.  Develop a set of reasonable and achievable projections as a basis for negotiations with company stakeholders.
    • Sale of the Business (or Equity) – Identify and negotiate with prospective buyers of the business, its assets, or equity.
    • Bankruptcy Preparation – If bankruptcy is an option, whether to reorganize the business or sell assets through Section 363, help prepare the company for a seamless transition into Chapter 11.

While each distressed situation requires a different playbook to effectuate a successful restructuring, the goal of a CRO remains unchanged.

“In the end, the goal of a CRO is to restructure a distressed company’s balance sheet and make the difficult determination of defining the company’s business within a compressed timeframe.  An effective CRO insulates the company’s officers from the detailed reorganization process by leaving them free to pursue the day-to-day operations of the company and implementation of the new business model.”[vii]

 

Summary

While CROs were rookies back in the 1980s, today they are commonly found navigating distressed businesses through the treacherous waters of out-of-court restructurings or Chapter 11 filings.  CROs are retained for the value they provide stakeholders in times of distress.  They supplement a management team’s existing skill set by providing restructuring expertise, resources and credibility at a time when failure for the company is not an option. For company (debtor) focused restructuring professionals, a CRO role is today considered the gold standard of assignments.

 


 

About the Author

Todd A. Zoha, CTP, CIRA, is a Managing Director at MorrisAnderson based in Chicago.  He has 16 years of experience as a C-level executive (CRO, CEO and CFO), seasoned restructuring professional and trusted business advisor.  He specializes in crisis and interim management, corporate restructurings and transformations, financial and/or operational turnarounds, cash enhancement, and performance improvement initiatives.

 


 

[i] The views expressed herein are those of the author and are not necessarily the views of MorrisAnderson & Associates, Ltd., its management, subsidiaries, affiliates or other professionals.

[ii] “CRO Is Newest Acronym In Corporate Lexicon”, Forbes, February 19, 2002.

[iii] Robert J. Berdan and Bruce G. Arnold, Displacing the Debtor in Possession:  The Requisites for and Advantages of the Appointment of a Trustee in Chapter 11 Proceedings, 67 Marq. L. Rev. 457 (1984).    

[iv] Ibid.

[v] Ed Flynn and Phil Crewson, Chapter 11 Filing Trends in History and Today, Office of Research and Planning, Executive Office for the United States Trustee (https://www.justice.gov/sites/default/files/ust/legacy/2011/07/13/abi_200905.pdf).

[vi] Ibid.

[vii] Shai Y. Waisman and John W. Lucas, The role and retention of the chief restructuring officer, Weil, Gotshal & Manges LLP, The Americas Restructuring and Insolvency Guide 2008/2009, pgs. 200-205.