The Financial Doctor Is In.

By Allan Nackan, CA, CIRP A day in the life of an insolvency professional is not unlike that of an emergency room doctor dealing with patients at different stages of illness. Like his medical counterparts, the financial doctor is often more successful when there is early diagnosis and treatment of problems. In those cases, the prognosis for survival is greatly enhanced. Unfortunately human instinct is to deny problems and keep fighting for survival. When you are so busy doing triage, you take your eyes off the big picture, often making short-term mistakes and decisions motivated by immediate gain as opposed to more carefully, thought out, strategic plans that will serve your long-term interests. This is where an insolvency professional can help out, providing an objective assessment and applying years of experience to find a creative solution. When to make the call If you wait for the bank to pull the plug, it is often too late. Suppliers will likely have been alienated, key relationships damaged, contracts terminated and there may be a general spiralling out of control. Management needs to listen and sometimes have to acknowledge the hard facts that they may be part of the problem and, at a minimum, should step out of the way for an experienced Chief Restructuring Officer (CRO) to shepherd the company back to good health. The CRO is best equipped to make objective assessments, execute the tough decisions such as staffing cuts, plan divestitures, identify opportunities, negotiate concessions with creditors and key stakeholders, manage relationships with the companys lenders, ruthlessly control cash flows and work to boost revenues and enhance the bottom line. This action usually allows the luxury of more time to restructure and more options from which to choose. Writing the prescription However, even if the disease spreads there are a number of tactics that are available giving the company a temporary reprieve and some room to make some fundamental changes. If filing under the Companies Creditors Arrangement Act (CCAA) or a proposal under the Bankruptcy and Insolvency Act (BIA), this results in an initial stay period providing the company and its professional advisors some time to develop a plan of restructuring and to sell this plan to its stakeholders. The plan allows for the opportunity to restructure debt whereby creditors can accept so many cents on the dollar in final settlement of their claims or they can agree to defer payment or convert their debt to equitythe possibilities are endless and only limited by the imagination of those planning the restructuring with the approval of the creditors. The CCAA applies to companies with more than $5 million in debt and is the Rolls Royce of restructuring vehicles in that it allows maximum flexibility and access to the Courts. This is the process (using a Depression Era statute which has been revived) under which many of Canadas largest restructurings have been facilitated such as Stelco, Air Canada, and Algoma Steel to name a few.

However, for smaller companies this process is likely too costly. Equally good results can be achieved by filing a BIA proposal. This statute provides a much more structured and predictable process with defined timelines wherein a proposal/plan for the creditors must be tabled for consideration. The initial 30-day stay period is automatic and this may be extended by the Court to a maximum of six months. The process is overseen by a Trustee, who monitors cash flows, reports any material adverse change in circumstances to the creditors and also assists with the development of the plan and running of the formal process. Creditors are invited to vote on the plan, which, if accepted by the majority of creditors representing two-thirds in value, is binding on all creditors. However, if the creditors or Court rejects the plan, an automatic deemed bankruptcy follows. These cram-down provisions and the automatic bankruptcy feature often help to focus the minds of all stakeholders and facilitate common sense business deals. An initial emotional reaction by creditors often subsides when they appreciate that what is being offered is better than the alternative of a bankruptcy. After all, if the company succeeds, jobs will be saved, business opportunities will be preserved and rehabilitation facilitated, all of which is good for the stakeholders and the company generally. Performing the operation I am reminded of the example of a household goods manufacturer who engaged our services. Our client had recently merged his manufacturing business with a much larger competitor. Although the combined business enjoyed many synergies, management styles of the two partners were at opposite ends of the spectrum. Our client also soon learned that the well being of the larger company had been misrepresented to him and there were many more skeletons in the closet than he had anticipated. The company succeeded in filing a BIA proposal that was accepted by the majority of its creditors and the Court. This plan facilitated the way for a necessary injection of capital and the company soon flourished and was ultimately sold for many multiples of its value prior to the proposal. At one end of the spectrum, there are bankruptcy and receivership situations. However, this does not necessarily mark the end of the line. Much like a patient who must lose a leg to survive, substantial structural changes must sometimes take place - divestiture of a division, downsizing, shaking off excess debt, etc. Very often this point of crisis provides an opportunity for a purchaser to acquire a companys assets at a bargain basement price while leaving the debt behind in the bankrupt or receivership company and applying new skills to restore its viability. Much to the surprise of the uninformed, in certain circumstances, it is also possible for existing managers and owners to repurchase the business from the Trustee or Receiver as long as this is a commercially reasonable transaction. The following is an example of a successful turnaround from a bankruptcy situation. In the mid 90s, our firm was appointed as Trustee in Bankruptcy of a major Canadian movie studio, located minutes from downtown Toronto. The property comprised approximately 200,000 square feet of leaseable space on about nine acres of land. It was plagued by many problems, including unpredictable cash flows, a poor operational reputation, environmental

nightmares and building code deficiencies. The major chartered bank that was owed approximately $10 million wanted to take the loss, avoid any environmental liability and urged the Trustee to run a tender process and conduct a quick sale of the business. As predicted, offers received were at huge discounts. However, shortly after becoming involved with the property, the Trustee identified key business opportunities and was able to keep the facility operating in bankruptcy for a period of three years. The film production users of the property welcomed the professional, business-like manner in which they were treated. The Trustees efforts were aided by a booming movie industry, which was generating in excess of $500 million of revenue for the City of Toronto. The operating results were a seven-figure net income for three years, during which time the Trustee solved many of the environmental and building issues, stabilized the business and introduced some creative new business ideas such as the creation of a courtroom set. By way of explanation, in the movie industry, sets are struck down at the end of each movie and rebuilt anew each time. Certain sets are a common feature of many movies, e.g., courtrooms, police cells and business meetings. Maintaining these standard features was a draw to the property and generated extra revenue. The property was subsequently sold for a very respectable price, allowing the bank to recover substantially more than they ever imagined. The City of Toronto was delighted to have a property remain intact that generated 25% of the Citys film revenue, thus preserving tax and other revenues and many high-skilled jobs. The purchaser of the property brought many years of professionalism and experience in the real estate business, as well as access to substantial funds. They were able to significantly improve the property, thus enhancing revenue and the result being that it continues to operate as a world-class movie production facility. The business is now worth countless multiples of what it would have commanded when the lights went dim. As you have read, each situation is unique and every company needs to be looked at individually. Survival can very much depend on the creativity of the doctor.
Allan Nackan is a partner with the Toronto-based firm of A. Farber & Partners Inc., which has provided expert advice in the areas of insolvency and restructuring for over 25 years. Other specialty services provided by the Farber Financial Group include forensic accounting, fraud investigations, corporate finance, turnarounds and CFO placement services. For more information please visit: www.afarber.com