There were the management consultants with their button-down collars; then the dotcom doofuses in zany T-shirts; investment bankers in Corneliani suits; hedge fund guys with the tieless City look; private equity buccaneers in roll-neck cashmere. But now it's the corporate doctors who are back in fashion. Even with their slightly too tight shirts and an extra pair of pants with every navy suit: the chief restructuring officers, the asset maintenance teams, the insolvency experts, the turnaround specialists. And, after the doctors, maybe, will come the toe-cutters and the undertakers. Because the cycle has turned. If the past decade and a half was about wealth creation in all its glory, this year it is starkly about wealth preservation. Belts and braces time. Once again cash flow is king; structures are being simplified and luminaries in the turnaround field are being called in by banks, and even a few nervous companies, to neaten the accounts, shore up some financing and stress test the business model.
"Sexy again?" says veteran Ferrrier Hodgson insolvency expert Andrew Love, with a laugh. "Maybe. There's no doubt there was something of a bell rung in August last year [with the first collapses of the current liquidity crisis]. We are starting to see a lot of work, in the sense that people like to have someone around who has seen some drama, been through it, but that work is not really public." Those proactive companies are the smart ones. But there is, Love says, "bankruptcy neurosis".
It's characterised by a lot of denial. And inevitably, as there always is at the end of a bull market, some downright shonkiness. If turnaround is the new black, the management consultants are already onto it.
As companies started to tumble in March, McKinsey & Co warned: "Few executives are making the kind of radical contingency plans that would be necessary should earnings fall back to - let alone below - their long-term average. Boards and executives shouldn't postpone planning for a downturn - including efforts to seize the competitive opportunities that a slump might unearth." Even superannuation funds, blessed with a mandated 9 per cent per annum of every worker's salary, are starting to look at the opportunities coming out of this cycle, says KPMG head of corporate finance Paul Thomson.
But let's not get ahead of ourselves. There will undoubtedly be plenty of carnage to come and no two cycles are the same. "This time around the funding structures and the corporate structures are quite a lot more complex," says Thomson. "Some of that is to do with the globalised world of finance; but with the early '90s, for example, even if there was a complex syndicate, you could track it back. With some of the structures today, you can't even track down the counterparties."
The outlook is indeed getting bleaker. According to business intelligence service D&B, expectations for sales, profits, capital investment and employment growth have declined or remain weak. "Almost one in 10 Australian companies are rated a high risk of experiencing financial distress or failure in the 12 months through to the end of 2008," says chief executive Christine Christian. "The average value of debt referred to D&B for collection has increased, up 54 per cent across all industries in 2007. Trade payment days have increased."
Gwyn Morgan, Westpac Banking Corp's head of asset structuring and risk management, who is in charge of monitoring credit quality, establishing 'watch lists' and moving bankers into companies if necessary, says he is taking on extra staff. And that's not easy because so are the insolvency firms, accountants and lawyers. His good news, however, is that the banks no longer believe it is in anyone's interest to charge in at the first sign of distress, bankrupt someone and recover "maybe a few cents in the dollar. We can get a much better result working with the customer; we can get a better return if it works out we get a customer for life - and we can make money on these situations," he says. "We do manage these companies very, very intensely and, perversely, management sometimes doesn't want us to leave."
The end of the cycle has hardly been a surprise. The Australian banking industry, the conduit for the wider economy, has been telling everyone bad debts have been unsustainably low for nearly four years. A generation of now senior executives has never seen a significant Australian downturn. But, uniquely, the good times have not ended as they have in the past because of native factors - the all-too-familiar boom and bust of past Australian cycles. Instead, this is a foreign crisis, triggered by the pricking of a housing bubble in the United States, itself simply the most obvious example of a globalised economy awash with money. Cheap money.
Cheap money coupled with all too short memories of the last time things went awry on Wall Street - and that was only five years ago - meant the risk premium for debt had almost disappeared, literally. As Bill Gross, who runs Pimco, one of the world's largest and most successful fixed interest funds, said incredulously last year, before everything went pear-shaped: "When the premium paid for the riskiest debt is only 2.5 percentage points over the safest, and the historic default rate of that debt is 5 per cent, and about 60 per cent of the principal is lost in a default, any loan made at the rates prevailing last year would lose 3 per cent over the life of the loan. High-yield lenders were giving away money." And so it has proved to be.
With this being a funding rather than economic crisis, Australia enters it in the unprecedented situation where interest rates are still rising while those elsewhere in the world begin to fall - officially, that is. Anything requiring debt, either large amounts or rolling access, also faces prohibitively high interest rates as previously risk-immune creditors suddenly become hyper-allergic. Apart from those heavily geared casualties, corporate Australia is actually in decent shape, overall.
A survey of corporate health by 333 Performance Manage-ment, part of KordaMentha, finds 56 per cent of listed companies are healthy and 61 per cent improved their health in 2007. Yet that leaves 20 per cent unhealthy and a further 11 per cent declining towards unhealthy. The 56 per cent with a health tick on 2007 data was the highest recorded in the nine-year study; the 20 per cent unhealthy, the second lowest.
Unsurprisingly, gearing - debt - was the key indicator of health, according to 333 managing director, Martyn Strickland. "When you look at corporate health over the past 10 years, the disappointing thing is that despite the good times, on average, Australian companies have not improved their key drivers of good corporate health," he says. "It will be these companies who now face the biggest risk of failure if the downturn continues."
Usually, the realisation that things have gone awry hits suddenly, even if the signs have been there for a while. "We call it the 'oh shit' day," says Westpac's Morgan. That, of course, is good news for the corporate doctors and their definitively counter-cyclical business. "I think there's now been a few situations on the hop [with corporate failures and near failures] - and some of the creditors have been caught out a bit - having slimmed down their asset restructuring teams in recent years," says Love. "And the reality is there are only a few high-profile individuals and firms with the resources to take on this major work." Individuals such as Lindsay Maxsted, Mark Mentha and Steve Sherman.
THE EMINENCE GRISE
Lindsay Maxsted quite likes the title chief restructuring officer. The former chief executive of KPMG and insolvency industry doyen stresses, however, it has nothing to do with the role he had with his former firm. Very diplomatic - because while Maxsted has now struck out on his own, he looks forward to working closely with KPMG on many workouts. "I heard the title, chief restructuring officer, first in the United Kingdom and it struck me as a good one - it's the individual appointed to see through a restructure, a sort of chief executive/chief operating officer," he explains.
"One of the challenges with a restructure is to have someone in charge whom the creditors and the management can have confidence in. In the UK, that might be someone appointed to the role with a background in running distressed situations; in Australia it is often the CEO."
Maxsted cut his teeth on some of the trophy insolvencies of that great period of corporate carnage in Australia, the late '80s and early '90s. He took the helm of seriously distressed assets such as Bond Brewing, the Bell Group, McEwans Hardware, Brashs and a raft of companies associated with Abe Goldberg.Impeccable discretion has always been a hallmark of the Maxsted style, indeed it is said inside KPMG that he was not a big supporter of annual partner-media Christmas parties because some of the discussions might have been inappropriate.
To that legendary discretion should now be added an impeccable sense of timing. Maxsted has left KPMG to hang up the shingle for his own boutique restructuring firm, Align Capital, just as the cycle is turning down. It's not, he again hastens to add, because he saw dark clouds looming and took the opportunity to start selling umbrellas. "No," he says laughing. "It is more about flexibility. I wanted to do this seriously but I was also wanting to explore board opportunities and, as a partner at KPMG, that wasn't something I could do."
Maxsted has had no trouble filling his slate on the director front. He stepped down as CEO of KPMG on December 31 last year; retired from the KPMG partnership on February 29 and launched Align Capital on March 1. On which day he was also formally appointed to the boards of Westpac Banking Corporation and Transurban Group. Nor would the role of CRO be a completely new experience. In previous cycles and regimes, Maxsted has worn titles such as receiver and manager, scheme manager and - as a last resort - liquidator, often in tandem with fellow KPMG insolvency whizz David Crawford.
"I think the big difference this time around is it is liquidity driven, global liquidity," he says, "which is not to say it won't at some point develop into a credit problem. We are not seeing [those bad debts] yet though, by any means, not that more typical corporate cycle of the last big one in '90, '91, '92." While debt and high gearing are the issue, it is not so much the price of debt but its availability. Risk premiums may have spiked up, even by 2 or 3 percentage points, but compared with that earlier cycle, when the bank bill rate topped 21 per cent, interest rates per se are manageable.
"The complexity of the debt is different this time around, just as the '90s was a lot more complex than the '60s," Maxsted says. "Different facilities, different structures, derivatives, debt packages, different regulatory structures. With debt much more globalised, you may have people in there who have bought debt at 70¢ in the dollar and have a different hurdle to everyone else around the table."
For all that, Maxsted says the fundamentals of what he does have not changed. That's restoring underlying cash flow, often neglected in boom times when there is deal making and seemingly inexorable capital growth. "There is a lot of commonality with how you deal with these situations ... but the absolute bedrock of all of this is trust," he says. "If the creditors are going to allow you some space - even funding - to work these things out, they have to have trust. There must be transparency." Nor does he think human nature changes with the cycles. "There is probably the same number of shonks out there, but they have always been the minority."The éminence grise
Steve Sherman was the liquidator of One.Tel but liquidator is not a title he's particularly keen on. The Dude - that young, hip, slacker-type who was One.Tel's mascot - is not quite the image either. But somewhere in between is where Sherman sees his role today. "When I joined the industry, straight out of high school in 1979, there was literally an A-list of liquidators under the existing legislation; there wasn't really the idea of corporate recovery," the Ferrier Hodgson partner says. "There is no doubt that the industry has become more sophisticated. We don't just walk in the door, turn off the lights and that's the job done. For one thing, there's no skill, no joy, in that."
For such a quintessentially counter-cyclical industry as the turnaround business, a decade and a half without a recession inevitably means quiet times. That's when successful firms develop their own new businesses. Ferrier Hodgson offers three: corporate advisory, forensics and corporate recovery. "The reconstruction space is where we make our money but we do have other skills we can bring to the table," Sherman says. "There is a balance: we want to offer the best candidates a lot of opportunity: we want young graduates who might be thinking of investment banking to think of us; equally, it is incredibly important to have actually been through a cycle before, to actually see the impact, the human impact."
For Ferrier Hodgson, the cycle is about adding value for clients right through, even when a company is travelling well: "You might be making $4 million EBITDA but should you be making $5 million or $6 million?" Bringing the experience of corporate restructuring and recovery to bear allows a rigorous assessment of whether a company is properly structured, whether it is funding itself in the most efficient manner. And with that obsidian eye of the corporate doctor: can it sustain itself in this form? Which is not always the question an investment banker will ask.
Forensic accounting is another specialist business Ferrier Hodgson has built up. Established as an adjunct to the recovery practice, which often involved gumshoeing it through files and erased hard drives, the business is now well established in its own right. Troubleshooting and crime-scene investigation spring immediately to mind but Sherman says the information gathered can be built into pro forma applications, overlaying the experience from other companies onto the challenge at hand.
While that helps, there is no doubt personal experience is irreplaceable when it comes to walking in the door for the first time. "Often you get a sense quickly whether a problem is endemic or short term," he says. "That experience also helps to avoid the situation where management thinks 'oh no, this is the end' when it doesn't have to be."
Sherman, particularly in the dot-bomb phase of the previous 'new paradigm' business cycle, developed something of an expertise in what was then lauded as the TMT sector - technology, media and telecommunications. Cinema Plus, Comindico and Planetel all had his caring attention following earlier experience with Australis Media. He is currently spending some time with the Allco group in its hour of need.
With the cycle turning, Sherman says it is not just experience that is vital but the full resources of a larger firm, something that is necessary to deal with the sheer complexity of business structures today and their global funding. "Ideally, people would be coming to us much earlier, even if there's just been a hiccup," he says. "You can achieve a lot more working with the creditors with a bit of time. Ultimately, business fundamentals are the same in an upturn and a downturn. Management is the same; cash management is the same."
Nor does the liquidity crunch spell doom. For one thing, small- to medium-sized business was not accessing international capital markets anyway. For another, there will be private equity firms and vulture funds once again eager to work with firms such as Sherman's to turn around distressed business - at more realistic buy-in prices. "There is a sense of anticipation that we will see more opportunity ahead," he says. "I know that sounds like a bloodthirsty pirate but there is a sense of anticipation. But who knows? It may be just a blip."
Those who have ridden a few cycles in the corporate recovery caper speak of the emotional challenge of dealing with management in denial or owners who watch their life's work come apart at the seams. In the looking-glass world of insolvency, when a company's in distress, it's good news for the corporate doctors. And, in 2001, Mark Korda and Mark Mentha, two partners from one of the world's leading accountancy firms, Arthur Andersen, were running one of the highest profile rescue bids in Australian history, Ansett Airlines.
Which is not to say it wasn't stressful. Korda estimated 60 nights on the trot without dinner at home. With negotiations concerning the Ansett rescue sometimes
stretching well past midnight, and 7am meetings the rule, Mentha became very familiar with the office couch. Touring The AFR Magazine around his firm's newly remodelled office at Melbourne's 333 Collins Street, all mid-century Moderne curves and timber, Mentha strolls out on to an outside deck area overlooking the Yarra and Southgate. "It's great for client functions, staff barbecues - or to walk out at two in the morning for some fresh air after you've been negotiating with Lindsay and Solly all day," he says drolly.
The Lindsay Fox-Solomon Lew Tesna rescue bid for Ansett infamously fell apart at hour 11.59pm and Ansett collapsed. The receivership had made the two Marks' names but the blow was still profound. "Gutting," Mentha says. Yet, barely a week later, there was another blow. The firm Mentha had dedicated his life to, Arthur Andersen, was gone, blown apart in the United States over its auditing of Enron and facing incineration in Australia for its role with failed insurer HIH.
Rather than be taken over by a rival, the two Marks established their own firm, KordaMentha. Already experienced insolvency practitioners, Mentha says the firm learned a "hell of a lot with Ansett; it was so complex, every plane has a different owner, different structure. We had done Budget [owned by Bob Ansett when it collapsed] and so with Ansett we had done the father and the son," he says. "But when I remember the complexity and I look at some of these financing contracts today, in this environment, it's pretty challenging."
With the collapse of Andersens, KordaMentha was able to bring in whole teams to quickly establish a top-tier practice. Mentha agrees that the complexity of financing arrangements is the principal difference in this cycle, adding that the sheer scale of the liquidity bubble which fed these instruments is another factor. "The bigger the bubble; the bigger the bang. What we've clearly seen happening is every phone call is big. For a time it was millions, then tens of millions, now it's billions; the debt has just ratcheted up. And it's not 18 banks in a syndicate that's an issue; it's when the financing is opaque."
While all cycles play out differently, the core challenge remains the same: human nature. "People do have core values," he says. "We do work with a lot of people who have such strong self-belief, there is a sort of contagion, and they find it hard to accept their business model no longer works. But that self-belief is also what you see in entrepreneurs, chief executives. So that's one of the skills for us, to understand people, to understand that mind-set. You have a radar for crooks because the one thing you must have is trust. But those with really strong self-belief who can't see reality is probably 40 to 50 per cent. And then you get the people who, despite being under enormous personal duress - maybe a huge company, a family company - are just incredibly professional. You have to admire that."
KordaMentha now spans corporate recovery, restructuring, corporate advisory, distressed real estate and even investment funds. "[With] Gribbles Pathology, we came in as KordaMentha but we were able to engage our property guys, realise some property, then our performance management team to work across the business with the new CEO, then our M&A arm to work out the ownership," Mentha says. "We took a company that was going into administration, paid back the banks, got the shareholders 63¢ in the dollar, restarted it. That was great. That was a shitload of fun."
Why things are different...
Corporate funding is more complex
Rather than one or a handful of banks providing debt, that debt might have been sliced and diced to the point where counterparties are hard to find.
Corporate structures are more complex
Not only are companies more global, they have been structured in complicated ways to take advantage of the more complex funding on offer, leaving creditors unsure of where they stand in the queue.
At least for the moment, this is a liquidity crisis
Companies will suffer not because their business has gone bad but because they can't refinance due to the credit crunch.
Sons of Gwalia
This precedent-setting court decision potentially allows shareholders to rank equally with unsecured creditors.
Litigation funders and plaintiff law firms are far more active in exploiting opportunities, such as Sons of Gwalia, adding a new level of complexity for creditors.
Banks and other creditors, believe it or not, are more anxious for a workout. Experience tells them that this delivers a better return, maintains customer relationships and is ultimately better for business.
... and still the same
If you owe the banks $1,000 and you can't pay, it's still your problem. If you owe them $100 million and you can't pay, it's still theirs.
Cash is still king
Complex financial companies are not just a hassle because they're complex but because they don't have stock-in-trade that can readily be converted to cash. Creditors and 'turnarounders' immediately look for opportunities to generate cash.
The asset management person assigned to your company is never as well dressed and friendly as the marketing person who sold you the debt.
Fairfax Business Media
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