LONDON -- When European companies find themselves on the brink of insolvency, their bankers are increasingly offering a bit of stern advice: Bring in a chief restructuring officer -- fast.
CROs, frequently supplied by U.S. turnaround firms now active in Europe, take a lead role in rejiggering balance sheets, operations or both -- while keeping creditors informed about the foundering company's cash position and overall prospects.
These fix-it specialists, who have become mainstays at struggling U.S. firms, were a rarity in Europe only five years ago. Their growth since then can be traced to big changes in the way the region's companies are funded and investors' increasing activism when things go wrong. Bankers and others expect CROs' role in Europe to expand sharply as a global credit boom comes to an end and more companies face the prospect of insolvency.
If a company got into trouble in the past, a couple of banks that had been its lenders for years typically hammered out a solution or pushed the firm into liquidation. Now, European companies may have several types of loans, high-yield bonds and claims from suppliers -- debt that is constantly traded and revalued in growing secondary markets. That can result in a disparate group of creditors with different motivations and ideas on what their investments are worth.
For example, AlixPartners, of Southfield, Michigan, is lined up to step in as CRO at unlisted French-Italian safety-shoe maker Jallatte Almar, filling a void left last month by the departure of Jallatte Almar's chief executive and its main shareholder, London-based CVC Capital Partners, people familiar with the situation said. Lenders owed €165 million are in the process of taking over the equity.
Jallatte Almar's sales have fallen amid increased competition from Asia, and it couldn't meet its loan terms, said a loan manager at one of Jallatte Almar's original lending banks who declined to be named. He said his bank has since sold its loans to investors specializing in distressed corporate debt. "We suggested to CVC that there were these type of people in the restructuring market and they might like to talk to them," the banker said.
As Jallatte Almar's new CRO, AlixPartners' challenge will be to seek agreement among holders of about €120 million in senior loans and €45 million in lower-ranking mezzanine financing on how much of the equity they each deserve and whether to raise new capital to get the company back on track.
Nearly all of Jallatte Almar's original lenders have sold their loans in the secondary market, introducing new creditors from several hedge funds, according to the banker and other people involved in the situation.
Officials at CVC Capital Partners and Jallatte Almar declined to comment. A spokeswoman at AlixPartners confirmed that it has been advising Jallatte Almar on its restructuring since April 2004 but declined to comment on the CRO assignment.
Firms providing CROs have been adding staff in Europe. AlixPartners opened London and Munich offices in 2003 and now has about 80 professionals on assignment in Europe. Alvarez & Marsal, a New York-based restructuring firm, has opened offices in London, Paris, Milan and Frankfurt since 2000. The European restructuring arm of New York-based Kroll Inc., part of Marsh & McLennan Cos., in January acquired Talbot Hughes McKillop, a small restructuring firm that helped pioneer the CRO role in the U.K.
"Restructuring has become more complex because of the many classes of debt these days and the changing nature of the participants, with American funds and institutions coming in," says Paul Horn, head of European restructuring at Kroll Talbot Hughes. "In a lot of situations, it's clear to the more experienced players around the table that the company needs a chief restructuring officer, usually when the discussions are under way and things are already starting to get difficult."
While usually welcomed by bankers, the arrival of CROs often is unpopular with shareholders who fear being wiped out in a debt-for-equity swap. But "the alternative is nothing at all" for shareholders if the company fails, says David Blundell, a spokesman for the U.K. Shareholders Association, an independent group representing individual shareholders.
Steven Pearson, a partner in the business-recovery-services unit at PricewaterhouseCoopers in London, adds, "The reality is if a business is in dire straits, there is very little value anyway. A good CRO can stabilize the situation and bring better prospects to shareholders."
In a typical situation, creditors give a struggling company names of potential CROs. That link to the creditors can make public shareholders and company employees suspicious, since it could be construed they are taking control -- which indeed may be the result. But the CROs say they always work for the company, usually reporting directly to the board.
"We align our success with the success of the stakeholders and management. We don't want to have a different agenda," says Sankar Krishnan, a managing director at Alvarez & Marsal. Since February, Mr. Krishnan has been serving as chief executive officer of Ihr Platz, an Osnabrueck, Germany-based drugstore chain that has been struggling as Germans have pulled back on retail spending. A spokesman for Ihr Platz said he couldn't comment.
"Companies that get into distress don't have the infrastructure to manage it properly," says Ian McMillan, a senior loan manager at HSBC Holdings PLC in London. "We've been encouraging them to hire chief restructuring officers to act as a single point of contact between the corporate and the creditors. This saves an awful lot of time because communication is more effective and it frees up executive management to continue running the business."
One company that has received that advice from lenders in recent months is engineering group Jarvis PLC. The York, England, company ran into trouble when costs spiraled on government contracts to build and service schools and hospitals. Unable to pay subcontractors as its cash dwindled, work had come to a halt on unfinished schools and hospital buildings.
"We wound up in about 10 weeks of very intense simultaneous negotiations on 14 unfinished construction projects," says Eric Simonsen, a managing director at AlixPartners, who joined Jarvis last June as CRO and has helped the company to get out of the contracts to start afresh. Like many companies stuck with unsupportable debt levels, Jarvis now is moving ahead with plans to swap its £280 million (€407 million) in debt for equity.
The advice of CROs doesn't come cheap. The hourly rate for a managing director from a restructuring firm is in excess of €500, plus expenses -- in line with senior lawyers' fees -- and an assignment usually runs for six to 12 months. Additional fees based on preagreed hurdles, such as improving cash flow or completing a refinancing, also can run into the millions.
Jarvis paid £32 million in professional fees related to the restructuring in the six months ended Sept. 30, 2004, though just a portion of those went to AlixPartners. Jarvis Chairman Steven Norris says survival is worth the price. Without advice from a CRO, he says, "we couldn't have gotten the deal we got with our lenders. They needed to be satisfied the business was capable of pulling itself together and stabilizing."
