The Four Stages of Insolvency Communications Principles and a Case Study

ompanies enter chapter 11 with the intent to continue operating. Reorganization
enables a company to address most of the business issues that impede operations, such
as lack of cash flow, burdensome legal actions or the impact of weak operating units.
At the same time, a chapter 11 filing can create its own serious business challenge
that, if not tackled, will make it extremely difficult for the company to survive.
A bankruptcy filing undermines the confidence of those whose trust the corporation needs
to survive—<i>i.e.,</i> customers, employees, vendors and shareholders.

</p><p>While management and their legal counsel recognize that it is essential to communicate
to these constituencies during a bankruptcy, few do so effectively. The tendency
is to treat communications as a necessary evil that holds risks of greater exposure
to liability, rather than as a strategic device that can help accomplish business
objectives.

</p><p>There is still relatively little understanding of how to communicate during the
insolvency process. A scan of the past five years of public relations literature
reveals only one article about chapter 11 communication, and it focuses
exclusively on the announcement of entering chapter 11.

</p><p>We have identified four stages to insolvency communications, each requiring its own
set of strategies:

</p><ol>
<li>Getting into financial difficulties,

</li><li>Entering chapter 11,

</li><li>Submitting the reorganization plan, and

</li><li>Re-establishing the company's reputation.
</li></ol>

<p>In each of these stages, it is important to maintain the commitment of key
constituencies. These constituencies, or target markets, may fear that the company's
troubles will harm their interests.

</p><ul>
<li><b>Employees:</b> Employees will fear for their jobs.

</li><li><b>Customers:</b> Existing and potential customers will wonder if they will be able
to get products or services in the future.

</li><li><b>Investors:</b> If investors lose confidence, the underlying value of the company
may erode. In some cases, short sellers manipulate rumors or overemphasize bad news
to drive down bond prices.

</li><li><b>Vendors:</b> Some companies depend on strategic relationships with vendors and
suppliers; joint promotional programs are one example. Most companies need the
favorable terms that vendors might deny a company they perceive to be in trouble.

</li><li><b>Communities:</b> Communities and political figures will wonder if they're losing jobs
and tax base.
</li></ul>

<p>In all four stages, allaying fears about the company is essential to a successful
communications program. Companies that fail to follow the appropriate communications
strategies during each of the four stages of insolvency communications may find they do
not get the cooperation of the key groups they need to rebuild the company.

</p><blockquote><blockquote>
<hr>
<big><i><center>
There is still relatively little understanding of how to communicate during the chapter 11 process.
</center></i></big>

<hr>
</blockquote></blockquote>

<h3>Stage One: Getting into Financial Difficulties</h3>

<p>Key audiences typically learn about a company's financial difficulties because of
reports of a bad quarter, a bond downgrading, downsizing or the loss of a key
customer. After such a report, rumors will spread about store and facility closures,
financial difficulties and massive layoffs. The news media will often take the rumors
seriously. A company must, at the very least, tell the news media that it does
not comment on rumors, but should also consider denying or discussing certain rumors.

</p><p>Once a key audience knows that you face difficult financial times, it is important
to change how your company communicates to them, even if there is little likelihood of
a chapter 11 filing, by taking the following steps:

</p><ul>
<li>Increase communications about the benefits the company provides (<i>e.g.,</i> jobs to
a community);

</li><li>Underscore the long-term strength of the company's core operations; and

</li><li>Tighten up the process of disseminating information to the news media and
employees, and between operations and headquarters to be able to quickly respond to
rumors.
</li></ul>

<h3>Stage Two: Entering Chapter 11</h3>

<p>Once a company knows it is going to enter chapter 11, it must consider whether
to surprise employees, vendors, customers and investors with the news or publicly
discuss the possibility in advance. When a company is going to have a pre-packaged
plan, announcing the chapter 11 filing in advance is always advantageous. Whenever
the announcement comes, the company must immediately begin a campaign to tell key
audiences how it will continue to benefit them. Every communication with every target
market should focus on these benefits:

</p><ul>
<li>How the company currently benefits the audience,

</li><li>Why the company's continued operation will benefit the audience, and

</li><li>What the audience can do to help the company (<i>e.g.,</i> continue customary vendor
terms).
</li></ul>

<h3>Stage Three: Submitting the Reorganization Plan</h3>

<p>Once the reorganization plan is submitted, the company should lower its profile when
talking about the plan to investors or the news media. The company can continue to
make positive messages to customers, vendors and employees, but these messages should
focus on organizational strengths rather than the new financial plan. The idea is
to keep control of the process of negotiating and approving the chapter 11 plan by
keeping it out of the news media. The one exception is when there is a battle over
the plan or some group proposes an alternative plan. In these cases, the company
needs to weigh its public comments very carefully.

</p><h3>Stage Four: Reestablishing the Company's Reputation</h3>

<p>Once a company has undergone a financial reorganization, it must rebuild its
relationship with key audiences. And it must do so in a way that appears to be
frugal and sensible:

</p><ul>
<li>Communicate why the company is stronger now;

</li><li>Share news that demonstrates the company is back, or on the way back;

</li><li>Tell the communities in which the company has operations how it helps them; and

</li><li>Explain to employees and shareholders that the worst is over, and they will soon
enjoy the fruits of growth.
</li></ul>

<p>No company can repair its reputation overnight. Even an amiable pre-negotiated
chapter 11 may leave a bitter taste with many investors, customers or employees.
Rebuilding credibility will take a proactive communications program that may require
years of effort.

</p><p>Some companies change their names after emerging from chapter 11. A change of
name works best only if both of the following conditions exist:

</p><ul>
<li>The success of the restructured company depends on gaining large numbers of new
customers or establishing a large number of new products, and

</li><li>The company has a relatively large budget for re-branding its name.
</li></ul>

<h3>Case Study</h3>

<p>A few years ago, Jampole Communications provided communications counsel to support
the chapter 11 filing of a retail company that had stores in several contiguous
states. Although this company had strong operations, it was saddled with substantial
bond debt. After discussions with major bondholders, the company decided to restructure
the debt by filing for chapter 11 bankruptcy. The restructuring would leave the
bondholders as the major stockholders in the company.

</p><p>The company and its legal counsel were reasonably comfortable that most bondholders
would agree to the restructuring plan it had developed. But to achieve a timely exit
from chapter 11, the company faced these critical communications challenges, having
to:

</p><ul>
<li>convince <b>customers</b> that it would keep operating and that the shelves would remain
fully stocked,

</li><li>convince <b>vendors</b> that supply it with products that they would not be left with
large unpaid invoices,

</li><li>convince <b>employees</b> that the chapter 11 would have little impact on their jobs
because the company would keep operating and paying their wages and benefits, and

</li><li>influence the <b>news media</b> to report company news with a positive spin.
</li></ul>

<p>The central strategy of the plan was to tell key audiences that the negotiations
with major bondholders amounted to a virtual guarantee that the company would exit
chapter 11 as a stronger company. After consultation with the attorneys and
investment bankers, we decided to use the term "pre-negotiated chapter 11" to
communicate that there was overwhelming agreement among bondholders and that the chapter
11 filing was a formality.

</p><p>A full three months before the company entered chapter 11, we began telling
target markets that the company was evaluating the possibility of a financial
reorganization. Because we shared so much information so early on, neither national
nor local news media gave the actual chapter 11 announcement widespread coverage. All
articles gave prominence to the messages we wanted to communicate about the company's
future.

</p><p>Keeping our audiences committed to the company during the restructuring process was
challenging due to the fact that, before and during its chapter 11, the company
closed a number of stores. Rumors were rampant about the store closings in many
markets. To fight these rumors, we changed long-time corporate policy not to discuss
rumors of stores closings. For the vast majority of stores that we knew would not
close, we vehemently denied all rumors. By openly communicating about non-closures,
we maintained the loyalty of customers in areas where the company intended to keep
doing business.

</p><p>Once the company submitted its reorganization plan, we went into reactive mode,
making the company available to the news media but releasing no additional information
beyond the contents of the plan.

</p><p>Upon exit from chapter 11, we immediately began an aggressive communications
program in every community served by the company. Consumers responded positively to the
campaign. In the first full year after exiting chapter 11, same-store sales
increased and profitability improved.

</p><p>The company in this brief case history needed to gain the commitment and
understanding of key constituencies to outlive its chapter 11 filing. By
implementing a four-stage communications plan, we minimized the negative damage from
publicity about the chapter 11 and gained the future commitment of key
constituencies. There is no substitute for an improved financial structure, strong
operations and more effective merchandising, all of which the company has implemented
since its debt restructuring. But because the company launched an effective
communications program before, during and after chapter 11, key audiences found the
company's efforts credible, which contributed substantially to the company's ultimate
turnaround.

</p>