The Examiners: Restructuring Is More Than a Numbers Game

When a company files for Chapter 11 protection a second, third or even fourth time, who’s to blame?

In “The Tempest,” William Shakespeare sagely observed “that the past is prologue.” This admonishment is also relevant in cases where an organization files repeated Chapter 11 proceedings, known in the bankruptcy industry as Chapter 22s, 33s and so on.

A successful exit from Chapter 11 requires a combination of many complex factors, including the economic viability of the organization, insightful and capable leadership, a well-developed and effective operational plan and a sound financial structure. When these characteristics aren’t fully addressed or acknowledged in the restructuring process, the organization is at risk of another Chapter 11 filing or potential liquidation. Approximately 15 to 18% of entities that filed for reorganization in the last 30 years have sought bankruptcy protection more than once, according to New York University Professor Edward Altman.

On a fundamental level, minimizing the risk of multiple Chapter 11 filings requires that, upon emergence, the financial structure of the organization be appropriate to adequately service its debt and maintain adequate cash flows to effectively manage operations. While not necessarily a given for a firm recovering from significant financial distress, this is often the predominant focus of the courts and other stakeholders and receives the majority of scrutiny pre and post-emergence.

However, approximately 40% of companies that have reorganized via Chapter 11 bankruptcy continue to operate in “the red” during the 36-month period after emergence, Professor Altman reports. This certainly suggests that the continued viability of a recently emerged entity is more than just a numbers game.

The operational and strategic elements of a newly restructured firm must be afforded the same level of diligence and scrutiny that the financing and capital structure receives, yet these elements often escape in-depth examination. The lack of alignment among the newly developed strategy, processes, organizational structure and corporate culture may accelerate and exaggerate the company’s inability to execute on the newly defined strategy, particularly if the various stakeholders failed to address the historical challenges facing the entity prior to emergence.

So, who is to blame for when an organization experiences repeated distress? Assigning culpability is not an easy, exact or unbiased exercise, as there are myriad stakeholders involved in the often complex and cumbersome choices that lead to the decision to file for Chapter 11 protection. Focusing on the entire entity is a must, however, for all involved.

Ralph S. Tuliano is chief executive of financial advisory firm Mesirow Financial Consulting LLC and a member of the American Bankruptcy Institute’s board of directors.