Restructuring? Start Now And Bring A Safety Net
January 22, 2009
America has entered an era of renewal and repair. As a new Congress and president begin to reshape public policy, our financial institutions and companies are rebuilding. Whether you agree with his politics or not, one of the main points from President Obama’s inaugural address stands out: The time for half measures and putting off tough decisions is over. The time to restructure in earnest has arrived.
Restructuring advisors count among the few served well by today’s economy. One restructuring executive told me that the only upside to current economic conditions is the work coming to his and other restructuring firms.
So what are things to keep in mind if you’re a CEO or hold equity or debt in a company in need of restructuring? In talking to specialists, I’ve gleaned a few helpful hints to help.
First, if you think your company may need restructuring at some point in the future, start the process now. Too many CEOs and boards of directors are waiting too long to start the process, according to Larry Adelman, co-founder of AEG Partners. "CEOs and boards tend to think they can get through it or find a solution, so they don’t act decisively enough. …They’ll think, ‘Christmas will save us,’ or ‘We’re going into our season and we’ll be fine.’ It never happens… because things cascade."
And once you’ve begun to restructure, you need to make sure the company is not left with too much leverage. Barry Ridings, vice chairman of restructuring specialist Lazard, says that this overleveraging is the most common restructuring mistake he sees. "People aren’t leaving a safety net, they’re cutting it too close," said Ridings.
Pressure from creditors adds to this problem. Creditors want cash, new debt, and equity, in that order, according to Ridings. And what companies undergoing a restructuring need is more equity and less debt, which is the opposite of what creditors want.
Ridings added that the same mistakes from past cycles are happening again today. "There are too many hedge fund managers that don’t have any grey hair," he said, "so they’re going to make the same mistakes all over again."
Creditors need to bite the bullet and let these companies do what needs to be done to survive. Now is no time for half measures. "When you fix something you can either patch it or fix it," said Adelman. "Once you’re out of bankruptcy or you’ve completed a restructuring, it’s awful hard to go back."
So while yes, we can go back and restructure again, it would help to get it right the first time and not repeat the mistakes of the past. That might be the kind of change we can all believe in.
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