Corporate
restructuring has evolved from stigma to
strategy over the last twenty years.
Historically, corporate executives had fewer
resources at their disposal to navigate troubled
waters. Today, American businesses leverage
corporate restructuring as a strategic vehicle
to lead the way to stakeholder profitability and
enduring market value. Such use has resulted in
many companies emerging from Chapter 11
protection leaner, more competitive and better
positioned for long-term growth.
What situations
dictate consideration of a Chapter 11 strategy?
How does an executive team prepare to undergo
such an endeavor? Unfortunately, there are no
simple answers. However, we can consider some
guiding principles and an insider’s perspective
on how to approach the restructuring process.
And we can take a look at the power of corporate
restructuring in action through a real-world
example -- NRG Energy, Inc., a New Jersey-based
energy provider that owns and operates a diverse
portfolio of power-generating facilities that
emerged from Chapter 11 as a market leader.
Any discussion
of corporate restructuring would be incomplete
without addressing the recent Bankruptcy Abuse
Prevention and Consumer Protection Act (BAPCPA).
While the act’s revisions to the U.S. bankruptcy
code create new administrative hurdles in the
process, corporate restructuring remains a
powerful tool to see companies through to
profitability.
RESTRUCTURING
PRINCIPLES IN PRACTICE
As the stigma of
corporate restructuring under Chapter 11
continues to fade, it remains critical that
companies follow certain guidelines to ensure a
positive outcome. The companies that have
successfully emerged from Chapter 11 have had
similar principles that led them through the
restructuring process. They include:
1. Be Smart. Get
experts to help.
Corporate
restructuring is both an art and a science. Make
sure you enlist help from experienced
restructuring specialists. From the financial
and legal advisors to the claims and noticing
agent, these specialists should have experience
in managing and dealing with the complexities of
corporate restructuring.
2. Be Quick.
Time is of the essence.
Recognized
authorities in the restructuring industry are
renowned for negotiating and consummating
restructuring transactions expeditiously, where
possible. From needs recognition to
administration, the restructuring process can
end in a relatively quick period of time, when
feasible. A timely emergence from Chapter 11 is
a successful one.
3. Be Prepared.
Organize information for efficiency.
From the
planning phase through execution of the
corporate restructuring process, the
organization of company information is critical.
All key information should be clearly accessible
to help expedite the process and easily locate
the required data. Data and other information
needed during the process can include financial
statements, vendor listings, employee/retiree
listings, contracts, real estate deeds, etc.
4. Be
Transparent. Disclosure is good.
Develop a
strategic communications strategy to disclose
forward progress to relevant constituencies
during the restructuring process – from
employees and vendors to banks and the media. It
is critical that you know what to say and how to
say it, but it is also vital to recognize the
strategic relevance of your communications.
Success lies in open, transparent communications
with all constituencies.
5. Be Sensitive.
Take stakeholders’ financial insecurities into
consideration.
When dealing
with financial matters of this scale, emotions
run rampant. Be sensitive to the needs of
stakeholders and provide reassurance that their
matter is one of significance and is being
addressed during the process.
THE POWER OF
CORPORATE RESTRUCTURING
Over the last
decade, almost 70 energy companies filed for
Chapter 11 when the energy sector faced
repercussions from extenuating circumstances
such as the fallout of Enron. NRG’s
restructuring serves as an example of how
distressed companies can navigate the corporate
restructuring process and emerge with powerful
results.
In 2003, NRG,
together with 26 of its subsidiaries and
affiliates, filed for Chapter 11 to balance debt
incurred during an aggressive five-year growth
period of construction and acquisitions. Leading
up to its Chapter 11 filing, NRG was burdened
with seemingly insurmountable debt resulting
from increased fuel prices, declining power
prices and the impact of Enron on the overall
energy market. NRG set out to reduce its debt
levels, improve its balance sheet and align its
business strategy and operational structure with
the current economic climate and energy market
conditions.
NRG emerged from
Chapter 11 in exactly seven months. Due to its
restructuring efforts, the company eliminated
approximately $6 billion in corporate level debt
and other claims. Today, NRG is paving the way
to profitability with a strategic growth plan,
acquiring Texas Genco Holdings Inc. for $4.4
billion in cash, $2.7 billion in assumed Texas
Genco debt and 35.4 million shares of NRG common
stock.
The company also
completed phase one of its $750 million capital
allocation program. Through October 10, 2006,
NRG repurchased approximately 10.6 million
common shares at an aggregate cost of about $500
million, demonstrating its ongoing commitment to
returning capital to shareholders. The company
has paid down or removed more than $2 billion of
consolidated debt and is on its way to returning
over $1.6 billion to NRG shareholders. It also
plans to build more than 10,000 megawatts of new
power generation via 10 new power generation
facilities including coal, nuclear and
wind-powered plants across the United States.
Industry analysts agree that NRG’s efficient and
rapid restructuring process serves as a model
for one of the most sophisticated and well-run
cases in history.
BANKRUPTCY
REFORM: NEW CHALLENGES, NEW APPROACHES
In navigating
the corporate restructuring process, distressed
companies also must take into consideration the
requirements and administrative challenges
created by new legislation. On October 17, 2005,
the BAPCPA went into effect. Eight years in the
making, the act set out to deter abuse of the
bankruptcy system and reduce the amount of time
permitted for the Chapter 11 process. Most legal
professionals agree that BAPCPA has not made a
significant impact -- over the last year -- on
whether or not companies will consider Chapter
11 when they face financial distress. However,
the revisions created new administrative
challenges and reduced timeframes that require
vigilant planning and preparation prior to
companies undergoing the restructuring process.
The legislation
was intended to expedite matters to save costs,
but legal professionals have found it to carry
adverse consequences. Experts argue that reduced
timeframes can impede the outcome of a company’s
successful attempt to resolve financial and
operational issues. For example, under the
previous act, debtors were granted the first 120
days to file a plan of reorganization with
unlimited exclusivity. Changes to the law now
cap debtors’ exclusivity to 180 days after the
date for the relief order, limiting extensions
to exclusivity to a maximum of 18 months.
Some analysts
criticize the act because they claim it will
make Chapter 11 more costly, result in increased
litigation and heighten the incidence of
pre-packaged or out-of-court restructurings,
which may not give companies the opportunity or
resources required to adequately restructure
their operations.
Only time will
tell the true impact of the act on companies
undergoing the Chapter 11 process. Until then,
executives should consider the above-mentioned
guiding principles only with a thorough
understanding of the implications and options
available. As demonstrated by NRG Energy,
corporate restructuring can provide the basis
for corporate renewal and revitalization. And
while laws and requirements to the process may
change, corporate restructuring will remain a
strategic vehicle for corporate America’s quest
to preserve financial viability and enduring
market value.
Jonathan A.
Carson is a former restructuring attorney and
president and co-founder of Kurtzman Carson
Consultants LLC of Los Angeles, a premier
provider of administrative-support services and
technology solutions for the legal and financial
industries. For more information, visit
kccllc.com.
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October 2007 Issue
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