Communicating in the Zone of Insolvency

Successfully balancing competing interests can preserve long-term value. 

High debt loads, looming covenants, and industry headwinds made worse by the COVID-19 pandemic are causing many companies to move towards either in-court or out-of-court restructurings.

Chapter 11 filings are up 52% compared to last July, with 642 new filings in the United States year-to-date, with more likely to come. Restructuring advisors expect filings to accelerate and predict that the next wave of bankruptcy filings will spread beyond retail and energy companies to the travel industry and beyond.

The path to, through and out of a restructuring, however, can be a long one – putting new demands on media and investor relations in the interim.  In addition, all communications during this period carry unique legal risk and can influence often-delicate negotiations with stakeholders.  Understanding the “rules of the road” during this period, laying the messaging groundwork for a successful emergence and balancing the competing interests of stakeholder groups, is key to managing risk, maintaining credibility and preserving long-term value.

Prepare for Rumors & Leaks

The regular milestones along the path to restructuring make rumors or leaks all too common. Typical actions for distressed companies – such as hiring restructuring advisors, renegotiating bank agreements, negotiating with bondholders, or revising executive retention packages – are common signals that can trigger news reports and speculation and destabilize relations with stakeholders – particularly employees, business partners and vendors.  During this period, coordination with counsel and management is critical, and legal implications will limit communications options.  At the same time, this may be the best opportunity to seed messages around why a restructuring could offer long term benefits for your franchise and its stakeholders.

Plan for Multiple Scenarios
Companies often pursue multiple paths simultaneously and may not determine until late in the game which way the restructuring will go. Each scenario requires customized messaging and its own set of materials. Due to confidentiality concerns, communication leaders may not be able to bring in their full team until very late in the game, adding further challenges to an already complex situation.  Establishing the right team of internal decision-makers and outside advisors, and a clear line of communication in advance, can prevent your company from being caught flat-footed.

Customize Your Plan

In this day and age no communications materials stay confined to one audience, but the fact remains that each of your stakeholder groups have different concerns.  Consider the following as you prepare communications materials: (1) What is this stakeholder’s biggest concern?; (2) What is the best way to address this concern?; (3) Who is best positioned to communicate with them?; and (4) How and when will you reach them, particularly with so many working from home?

Breaking Bad News

Commencing a court-supervised process or an out-of-court restructuring requires careful communications planning, including the development of messaging and materials to ensure that all stakeholder groups are reached on day one.  While it can be tempting to try to soften the blow, research shows that people prefer clarity and directness when receiving bad news. Keep in mind that stakeholders may have emotional reactions to a bankruptcy announcement – driven by the facts of the case as much as the inherent uncertainty. Honest, empathetic communications can help minimize emotional responses and assuage fears while also clarifying the specific details of a bankruptcy filing.

Positioning for the Future

Most restructurings have a pre-arranged element that position the company to continue paying employees, key vendors and other business partners.  Laying out this process – as well as the potential long-term benefits of a restructuring – can go a long way to preserving value.  For non-liquidations, teams must keep their eyes on the prize – effectively communicating that upon exit, the company will emerge better capitalized, with continued employment opportunities and business relationships, and positioned for future value creation. As always, there are limits as to what can be said, both for legal and practical reasons, and speculation about potential future outcomes can lead down a dangerous path.  Focusing instead on what you know and can control is the best way to maintain credibility, and will pay dividends down the road.