A chief restructuring officer (CRO) is a turn-around expert with financial and operational experience in handling distressed or near-distress situations. In a typical situation, a firm will require an in-depth review of its business to ascertain underlying reasons for its poor performance and come up with a business plan that incorporates various operational improvement proposals.
They will need to have very distinct and clear milestones that would require implementation within a tight timeline. In conjunction with the various stakeholders, the CRO is charged with the responsibility of pressure testing the business plan and implementing the various turnaround/operational improvement aspects.
In these situations, a CRO becomes so important on dealing with creditors and other key stakeholders to ensure value creation preservation or creation while ensuring other company officers focus on the day-to-day job or running the business.
An example is where a CEO of a local manufacturing firm had to spend significant time negotiating with major secured lenders on delayed loan repayments attributed to cash flow constraints. In this case, the company’s margins were very tight, part of their debtor book had become delinquent, and the firm was experiencing sharp increase in costs. The resultant high leverage occasioned an imminent threat on breach of key covenants.
The protracted negotiations that followed meant the CEO had to spend a lot of time away from his day job of running the company to find a solution and prevent the company from sliding into abrupt insolvency whilst seeking for alternative liquidity. To address this, a CRO was quickly drafted in to lead these initiatives.
From experience CROs could fit well in situations where companies are going through significant distress notably due to sub-optimal financial performance that impact profitability and erode the balance sheet. This could be triggered by adverse macroeconomic as well as company-specific factors.
Macroeconomic factors that could trigger distress include black swan events such as Global Economic crisis of 2007/2008, Covid19 in 2020, and the Russia-Ukraine war which impacted the global supply chain. Other local macroeconomic factors include inflation rates, fiscal and monetary policy as well as demand and supply.
Company-specific factors include poorly planned and managed capital expenditures, fraud, inadequate or poor working capital management, corporate governance issues, operational inefficiencies, high leverage and sub-optimal value chains.
The CRO’s role tends to be interim in nature as they implement the restructuring programmes quickly. Their life span in any one job could be as short as a year or up to three years if it encompasses an operational transformation. CROs draw on an expansive financial tool kit but recognise that only certain tools will prove optimal in any given balance-sheet restructuring and that each situation is unique.
Incorporating a CRO to supplement management enables firms to navigate the complexities in a distressed or near-distressed situation, formulate an effective turnaround plan and engage all stakeholders.
The writers are leads at PwC Kenya business restructuring services practice
