Speculation about solvency persists around most companies that are considering either in-court or out-of-court restructurings. The chatter is frustrating, but it’s also damaging and can effectively become a self-fulfilling prophecy by disrupting operations, supply chains or employee focus. The tone of this speculation has shifted in recent months from questioning whether the company needs to restructure its balance sheet to whether the company may have to liquidate and effectively disappear.
The difference has major consequences for a company, particularly among its core stakeholders who have a direct impact on the company’s future performance and ability to conduct business. As a result, communications for companies in need of a financial restructuring has never been more important.
The Restructuring Narrative
Over the course of our restructuring communications work across the past several years, we have seen a familiar narrative: our operations are strong, but our debt level and interest payments have tied our hands. If we reduce debt through a consensual restructuring process, we have a clear vision and the opportunity for a successful future.
But market uncertainty stemming from COVID-19 throws a wrench in that narrative: the issue is not just debt but rather fundamental supply and demand issues. Consumer trends have changed, and it’s not clear when they may recover. Some shifts may in fact be permanent.
As a result, speculation about solvency is increasingly questioning the “going concern” story. And when stakeholders wonder whether a company may be going away altogether, they change their behaviors in a way that can accelerate the deterioration of conditions within the business. Employees start looking for other jobs. Vendors tighten terms. Customers look into alternatives in their supply chains.
The public affairs challenge is also much greater as government officials and regulators wonder whether they will be on the hook for certain liabilities. With high unemployment, these same officials are especially attuned to job losses in their communities.
When speculation is limited to the balance sheet, it is easier to reassure these stakeholders that it is “business as usual.” A balance sheet restructuring can yield tremendous results for a company in giving it greater flexibility to pursue its strategic path. But a balance sheet restructuring alone generally cannot address fundamental challenges with a business model.
Out-Flanking the Rumors
When the rumor mill comes around, most companies are quite limited in what they can say because while they may be considering alternatives to reduce debt, they are likely not ready to announce what steps the company will take to do that. While the company or its communications advisors may be able to shape media coverage to a limited extent, they will need to have a plan for outreach to key stakeholders in the event the speculation begins to cause issues with employees, customers or vendors.
One of the first items the communications team puts together in a restructuring engagement is a strategy document outlining various scenarios relating to a leak or rumors, including triggers for additional communication and thoughts on messaging.
A time of uncertainty warrants additional communications to acknowledge the speculation and reassure stakeholders to the extent possible. While the company may not be able to say that a restructuring is out of the question, it can point to ongoing initiatives that show that it’s business as usual, or past efforts that demonstrate a track record of reducing debt or managing through uncertainty. Key audiences want to understand the company’s long-term vision and the steps underway to address immediate issues, and have confidence in management’s ability to get there. A company that may be limited in discussing specific financial or strategic plans can still go a long way to stabilizing and strengthening relationships by communicating other noteworthy business updates, initiatives and progress.
The rumor mill is going to continue to churn, and the vast uncertainty in the market adds fodder. Being prepared for a range of scenarios can help preserve the value of the business during a trying time by giving employees, customers and vendors the confidence needed to maintain their crucial support. Priority should be given to communications since what a financially distressed company says in this environment is often as important as what it does to overcome its challenges.
Sydney Isaacs leads the Houston office of Abernathy MacGregor, where she advises clients on a range of major corporate issues and events, including restructurings and bankruptcies, M&A, proxy issues and crises. Sydney works across industries with a particular expertise in energy, and she is a leader of the firm’s bankruptcy and restructuring group.