May/June 2010

Restructuring on the Horizon? You’d Better Start Talking

In the panic-ridden days following the 2008 financial meltdown, the threatened companies that fared the best were most often those that communicated whatever hard facts they had at hand … even if incomplete or unflattering. When a company’s survival is at stake, honest intentions and even a small amount of clarity can go a long way.

Consider a company with a really bad balance sheet. Make that a life-threateningly bad balance sheet. Far from hunkering down, the company is out there talking — quite candidly — about that balance sheet with its customers and its employees, with its vendors and its lenders. The audience is responding pretty well.

There’s more to it, of course. The company is also talking up the good things, sometimes a strange assortment of good things. The overall massage is: “We’ve got a great business here. We know our balance sheet is awful. We’ve got a plan. We’ll get it fixed. Stick with us.”

This, greatly oversimplified, is one approach to survivability communications (or, as it is sometimes called, “parachute communications”). Its basic premise is this: Economic uncertainty today is extraordinarily high. Already-weak companies are very vulnerable. The availability of restructuring capital is extraordinarily low. Modern media lend both speed and credibility to bad news and to bad rumors. To survive restructurings, liquidity crises and other difficult circumstances, companies need to communicate more pro-actively than was ever the case in recent times.

Survivability communications came to prominence during the financial meltdown of 2008. Liquidity was scarce, leverage was problematic and any scrap of bad news or gossip could trigger a death spiral — the stock price drops, customers walk away, covenants are triggered, credit lines dry up, ratings agencies issue downgrades, vendors demand COD, regulators step in and, finally, there’s a bankruptcy filing, a shutdown or a fire sale.

In that panicky climate, the threatened companies that fared best were most often those that put out whatever hard facts they had at hand, even if the picture they painted was incomplete or unflattering. Honest intentions and small amounts of clarity went a long way.

That panic has largely subsided. The urgency behind survivability communications has not. The considerable shortage of restructuring capital (including DIP financing) can threaten a cash-strapped and rumor-plagued company with a “free fall” into involuntary liquidation (hence parachute communications. Hence also 7 is the new 11.) The early victims were financial institutions, then the real estate businesses; but it could be anyone with high-leverage, low liquidity, unexpected risk, shaky revenues or bad karma. Today’s best case is to make one’s future securing arrangements without seeking Chapter 11 protection — or else to walk into the courthouse with the necessary agreements already made. This mandate can be accomplished more reliably with active communications (counter-intuitive though it seems to some media pros).

Let’s divide the timeline into three phases. In Phase One, the company’s balance sheet crisis is somewhere between severe and critical, but a Chapter 11 (or other) filing isn’t yet inevitable. In Phase Two, filing is inevitable, unless dramatic remedies are found and put into place — and this is becoming apparent to key audiences. Phase Three begins with the actual filing. Important: Financial management knows when Phase One begins, but not if outsiders are talking up a free-

fall scenario. It’s vital that everyone with customer contact pass on, and upward, any indication of external concern. In some corporate cultures, this requires non-alarming modification of longstanding practices.

Phase Three communications haven’t changed much in recent times, largely because they’re dictated by legal and media realities. Phase Two was historically a time of near silence, and sometimes that still makes sense. But in the post-meltdown period, silence has given free rein to rumor, scaring off providers of dramatic remedies, scaring key constituencies and contributing to “free fall.” Survivability communications suggests this is a key time to be communicating — and, further, that the communications, which begin in Phase One, aid progress toward a business solution. Four basic premises lie behind this approach:

The Threshold Premise: The only belief that counts for the audience is “this company is going to make it,” or, more precisely, “their plan makes sense.” Until they hear enough to provisionally accept that belief, they won’t be able to hear anything else.

The Credibility Premise: We are all drowning in information that we don’t really believe. We want hard facts, and we prefer them validated by a third party. We mostly trust our own friends, our own experiences and our own business contacts.

The Velocity Premise: Thanks to the Internet and new media, bad news travels faster than ever (and good news only a bit more slowly). It doesn’t much matter how or to whom you first say something — in moments, it can be everywhere.

The Frame Premise: The first thing you hear about a subject establishes the context, or “frame,” within which you will hear and understand everything subsequent about that subject. This is the cornerstone of most modern political strategies.

With that as backdrop, here are the central ideas behind Phase One and Two communications:

Bankruptcy is an easy story for media to write and readers to retell: An unambiguous fact, a visible subject, a comprehensible narrative. An easy story to publish, too, like most negative stories. The possibility of bankruptcy is almost as easy. Once warning signs appear — a late payment here, a downgrade there, a breached covenant somewhere else — everyone talks to everyone else (the velocity premise), and a few of them talk to reporters. Two or three sources, and the reporter has his story, even if the company says nothing. Now the frame is established, and everything from that point on plays against that context: “Widget Corp. is in trouble.”

If there’s going to be noise, manage the noise. Name the problem before someone else does. (e.g., “debt we planned to roll over but now cannot” or “expansion plans the current economy won’t support.”). State the plan that will solve the problem. (“Restructure this. Cut that. Sell this. Defer that.”) Establish the frame for whatever comes next. “We’re digging ourselves out of a hole” is a good frame. “They’ve dug themselves into a hole” is a bad one.”

By naming new management, a large commercial REIT gave itself a chance to set a new frame; the new team quickly detailed a sweeping restructuring and downsizing of practically everything, then followed up with constant and detailed reports on every accomplishment along the way. The company received an award for communication; more important, it stayed out of Chapter 11.

Give some hard facts. Show you actually have a grip in the magnitude of the problem, and — equally important — that the underlying business is solid. (A large mall owner did a good job of showing its malls and other properties weren’t scarred by either the company’s financial issues or by the general recession, and is emerging from Chapter 11.) Give some milestones that will show the plan is working. Be sure the first couple of milestones are slam-dunks; if you miss early, second chances are hard to come by. Note: “Good business/bad balance sheet” is now a very palatable concept. In an earlier day, bad balance sheets were more often construed as the result of bad businesses. (General Motors initially left too large a group unsure its business model was viable.)

Talk directly to your key audiences. Everyone wants facts, everyone wants reassurance and everyone wants it from whomever they’re most used to dealing with. The vendor with the big receivable wants to hear something different than the exec who is getting calls from headhunters; the institutional investor wants to hear something different from the customer with the long-term contract. What everyone needs to hear: “Our lenders are supportive.” (or, at least, “we’re still working with them.”) So in-person communication is the gold standard; telephone calls are good; e-mails are not good; form letters and mass communications are disastrous. All employees, whose jobs involve contact outside the company are de facto relationship managers — the truck drivers can do as much good or harm as the sales force in this environment. If the message is “diggin’ our way outa the hole,” they should all have it on the tips of their tongues.

Don’t count too much on the media. For a lot of reasons, media credibility is pretty low these days — but if they publish bad news, true or false, it will add to a “free fall.” For a lot of other reasons, the credibility of corporate press releases is also pretty low these days. For anything other than required disclosure, best bet is to communicate directly to key constituencies. However it’s done, the messages will leak out fast enough — and the ensuing calls-for-comment will set up a more credible dialogue. Don’t dawdle. Reporter response time is now measured in minutes or less; delayed responses are usually lost responses. If a wire service or an influential blog publishes something demonstrably false, respond instantly with the facts. Once the inaccuracy has been forwarded a few times, correction is functionally impossible.

The tough question is always: “Are you going to file?” The default answer can be something along the lines of “We going to dig ourselves out of the hole, and we’ll do whatever it takes to make that happen.” But every situation is different. Sometimes straight talk about filing puts useful pressure on creditors, and speeds a workable resolution (Fear of filing helped a huge airline to achieve workable collective bargaining arrangements). Other times, anything that’s said is problematic. That may limit what can be said in a Phase Two situation. But it shouldn’t shut communications down altogether, as it once did. These days, silence is all too often an invitation to a free fall.

James T. MacGregor, a co-founder of The Abernathy MacGregor Group (AMG), became a managing partner in 1985, president in 2000 and vice chairman in 2006. Today, he advises clients across a broad spectrum of the firm’s client base, primarily in crisis management and in the strategic planning stages of transaction and investor relations assignments. He has advised clients on more than 200 mergers, acquisitions, spin-offs, divestitures, IPOs and other transactions, and on a comparable number of corporate crisis situations. Prior to the formation of The Abernathy MacGregor Group, he was a vice president of American Broadcasting Companies, where he spent ten years in various financial and communications positions. Earlier, he spent six years as a reporter and editor at The Wall Street Journal, and two years as an assistant to the president of CBS Inc. He can be reached at 212-371-5999 or by e-mail at jtm [at] abmac [dot] com.

James B. Lucas, a managing director at AMG, is based in Los Angeles and provides investor relations and corporate PR services to clients that range from technology to manufacturing to financial services companies. He has extensive experience with the communications support of mergers and acquisitions, corporate crises, restructurings, securities offerings, corporate control and proxy matters and corporate responses to activist investors. Lucas joined AMG in 2000 after operating, for six years, his investor relations and corporate PR consulting business in Santa Monica. Before that, he led communications functions at Health Net, a large HMO, and Maxicare Health Plans, then the largest publicly traded HMO company. He is active in the National Investor Relations Institute. Lucas can be reached at 213-630-6550 or by e-mail at jbl [at] abmac [dot] com.