Over the past few years, pursuing out-of-court capital structure solutions has become the preferred route for companies facing significant financial distress. According to JPMorgan, in 2024, 70% of loans and bonds were restructured out-of-court. Instead, debt for equity exchanges, refinancings and liability management exercises (LMEs) have supplanted in-court processes. These vehicles are meant to reduce expenses and limit disruption to the underlying business.
But let’s be clear: an out-of-court transaction has many of the same communications challenges of an in-court process. LMEs, distressed exchanges and other similar transactions bring significant communication hurdles that companies have to manage. As such, it is essential for the company pursuing an out-of-court solution to develop a thoughtful plan to communicate how it will support business objectives, align with the growth strategy and affect each stakeholder group.
Below are five key communications considerations for boards and management teams associated with an out-of-court process.
Beware “LME” as a generic term
Business media and trade outlets that cover debt and restructuring markets often use the term “LME” as a catch-all for any out-of-court solution. This is problematic, as an “LME” has come to imply lender mistreatment and deal contentiousness. Such conflict, real or perceived, can alarm customers, suppliers and employees. In fact, many out-of-court transactions are highly or even fully-consensual, and the inappropriate use of “LME” can impact perception of - and potentially impair - the process. It is crucial to engage behind the scenes with reporters covering the negotiations to ensure accuracy in coverage and avoid use of “LME” as a generic descriptor that may misrepresent an otherwise productive lender dialogue that will ultimately benefit the company’s various stakeholders.
Manage media leaks
Out-of-court situations trigger the same debt and restructuring media ecosystem as in-court processes. Companies should anticipate that once their name is mentioned in the context of any variation of a restructuring process, some combination of Debtwire, Octus, 9Fin, Bloomberg and other outlets will circle the company, lenders and other stakeholders. Companies may lose the ability to control which aspects of their financial position or operational performance become public discussion points. Companies that privately report their results and operations to lenders often find that media will cover their earnings reports based on unnamed lender sources. Ratings agency downgrades, customer contract news and any other operations developments that may signal distress also become a point of focus for the debt media ecosystem. Developing response plans and being prepared to address stakeholder concerns around these potential triggers is essential to avoid being caught off guard by related coverage.
Establish a plan before restricting lenders
Leaks during an out-of-court restructuring process can materially increase stakeholder concerns and complicate a company’s operations. Examples of these leaks include reporting of advisor retentions by the company and lenders, organization of different lender groups, specific details of negotiations, etc. This news flow, particularly that a company has engaged restructuring legal and financial advisors, can fuel further speculation among media and stakeholders that a Chapter 11 filing is imminent, even if the company’s intent is to pursue an out-of-court resolution. To address this risk, companies in an out-of-court process must have a detailed communications leak plan in place prior to restricting lenders, at which point leak risk escalates significantly. The communications strategy must calibrate how and when to pre-empt or respond to leaks to inform stakeholders that the company has begun a dialogue with lenders. The goal is to ensure employees, customers and others perceive leadership as driving a controlled and deliberate process, that business continues as normal and that leadership will update on progress at appropriate times. A strong leak plan enables the company to reenforce their position as being “in control” and minimizes the risk of rumors or misinformation undermining confidence during a sensitive period.
Prepare for competitor attacks
Companies with a significant proportion of revenues derived from a select set of customers are particularly vulnerable to attacks in out-of-court situations. Competitor sales forces may weaponize the process by targeting key accounts and exploiting the uncertainty created by the restructuring process. Any coverage around debt or restructuring trades can give aggressive competitors the opening to persuade customers that the company is in distress or unable to fulfill obligations. The best mitigation is a strong communications plan that anticipates this dynamic and proactively addresses potential competitor tactics around current or potential customers. This largely involves preparing sales teams to reassure customers, address confusion and reinforce business continuity without divulging confidential specifics of the lender negotiations.
Stick the landing
When a company ultimately implements an out-of-court solution, the leadership team should take control with a thoroughly planned announcement to the market, customers, employees, suppliers and other stakeholders. While there are nuances to announcing this type of solution, the key themes should center around a few areas:
The successful completion of a company-led process;
Vote of confidence in the company shown by lenders, e.g., by converting to equity ownership and, if applicable, sponsors re-upping with new money invested;
Strength of the long-term financial outlook; and
The company’s ability to continue or accelerate customer-centric investments into its business.
Finally, be ready to explain anticipated ratings agency downgrades on the prior debt, before the agencies re-rate the new capital structure. This ensures stakeholders understand the restructuring process is complete, notwithstanding potential post-announcement ratings action on legacy debt.