First, the good news: Corporate bankruptcies in 2022 have been running below average. Now, the bad: That is about to change. Big time.
Government stimulus, post-pandemic demand, and historically low interest rates combined to give companies the edge during the first half of 2022. Organizations that survived the pandemic shutdowns thrived as the world recovered.
In fact, Cornerstone Research, which tracks business bankruptcy trends in Chapter 7 and Chapter 11 bankruptcy filings by companies with assets of $100 million or more, says in its midyear 2022 update report that there were only 20 bankruptcies filed by companies with $100 million plus in asset during the first six months of the year. It’s the lowest midyear total since the second half of 2014.
But the US Federal Reserve is waging war on inflation with historically fast increases in interest rates – more than 3 percentage points in just six months. That, coupled with the threat of a global economic recession, is spelling trouble for highly leveraged companies and underperforming firms.
We asked two turnaround specialists to walk us through the highly charged bankruptcy landscape as 2023 looms.
Way back in 2009, the Great Recession hit America. And it didn’t pass me by.
In case you don’t remember how bad things were, let me refresh your memory: Bear Stearns failed. Lehman Brothers failed. Merrill Lynch sold for next to nothing. Countrywide Mortgage sold for pennies on the dollar. AIG had to be propped up by the federal government. General Motors went bust, was put on life support thanks to the federal government. People were worried. They wondered whether they would go to the ATM one day and no cash would come out because their bank had failed.
And me? I was at a startup called PV Powered. We were developing the next generation of commercial and utility grade solar inverters. We had about 100 angel investors and we were burning $750,000 a month when the Great Recession hit despite as much bootstrapping as possible. The next thing we knew, 98 percent of the investors had backed out, equity stake be damned, announcing they would no longer support the company. And who could blame them?
Unless deemed essential — think banks, food retailers, hospitals, and pharmacies —there’s a strong likelihood that COVID-19 turned many companies upside down. Employees went remote, workforces may have been trimmed, and some businesses were forced to temporarily (or permanently) shutter altogether.
There were obvious first steps for struggling businesses, including taking advantage of SBA loans such as the Payment Protection Program (PPP) and Economic Injury Disaster Loan Emergency Advance (EIDL), but stimulus packages aren’t bottomless and for many, bankruptcy appeared to be the only way out.
The effects have been devastating and seemingly irreversible, but as InterimExecs RED Team executive Yoav Cohen explains, “You almost always have a way out if you act quickly and decisively.”
We asked Cohen to break down turnaround strategies for businesses in crisis or distress and a step-by-step action plan to execute in our murky marketplace.
When teams struggle, it affects their productivity and the company’s bottom line. As part of a research team that evaluated the effects of another “Black Swan” event, Hurricane Katrina, I can draw direct inferences from those effects to the impact of COVID-19 and the time that it will take teams to recover.
We know how important this issue is because we hear the refrain from business owners and executives every day: You’re exhausted. Your teams are exhausted. And you worry that there’s far more under the surface, things your teams are experiencing that they’re just not talking about.
Chances are, you’re right.
Do you know whether your team might be experiencing these effects?
“Success has many fathers, but failure is an orphan” is a quote commonly attributed to John Kennedy as he accepted responsibility for the Bay of Pigs fiasco. The idea, however, is an old one. Roman historian and politician Tacitus said that, “This is an unfair thing about war: victory is claimed by all, failure to one alone.”
When things are going well, it’s easy to share credit as a team. When things go sideways, buck-passing and finger-pointing rule the day. Success has many fathers, but for companies, so does failure. The thing about business is that it is always about the people, the process, and systems already in place. And those can fail over time, even at the most successful organizations. Errors, however, can actually help a business move forward – if the problem is identified and fixed. It’s how the owner and management team respond to those mistakes, misses, omissions — or even complacency — that can make all the difference.
InterimExecs surveyed interim leaders from around the world for our 2020 Interim Executives Survey. In addition to asking executives about who’s hiring them and the roles they’re taking on, we asked executives for insights into “The Biggest Mistakes Companies Make.” While their responses varied, clear themes emerged in the areas of leadership, operations, human capital, strategy, financials, and change initiatives. Focusing on these fundamentals is a good starting point for any struggling business.
COVID-19 has caused unprecedented disruptions to the healthcare sector. Since the pandemic hit, hospitals and providers have had to deal with a surge in very sick, high-intensity patients while also having to shut down a huge portion of their traditional business. As non-urgent visits and procedures were cancelled, overall surgeries and hospital admissions plummeted. The combination of lower patient volumes, cancelled elective procedures, and higher expenses tied to the pandemic have created a financial crunch for hospitals, which are expected to lose $323 billion this year, according to a report from the American Hospital Association.
These drastic developments come at a time when the healthcare industry is already grappling with challenges posed by the digital transformation happening around electronic health record (EHR) implementation, Meaningful Use (MU) standards, HIPAA compliance, and the CMS’s Interoperability and Patient Access rule. The result is a reckoning throughout the country’s healthcare infrastructure, with a need for rapid changes and new thinking.
Everybody might be in the red right now, says RED Team member John Winenger, a veteran healthcare executive. “But how much is going to come back is the big question that everybody’s rapidly trying to assess.”
We spoke to Winenger and Michael Kreitzer, an expert hospital Interim CIO, about the biggest challenges providers and hospitals are facing, where healthcare goes from here, and the moves organizations can make—including bringing in outside help—to get out of the red and back into the black.
The reach of coronavirus in the manufacturing sector has been vast. A survey by the National Association of Manufacturers revealed that 78% of manufacturers anticipate a financial impact, 53% foresee a change in operations, and 36% are experiencing disruptions in their supply chains. The Federal Reserve reported that in March production fell 6.3% in the manufacturing sector – the largest drop since 1946. This has everyone asking what the short and long-term impacts look like as major economies around the world seemingly come to a halt to curb the spread of the virus.
Manufacturers everywhere are running into cancellation of exports, delayed payments, and disruptions in logistics. Economist Larry Hu told Bloomberg “The worst is yet to come for exports and supply chain. For the whole year, China’s exports could easily fall 10% or probably more.” Meanwhile the world is grappling with how to deal with supply chain break downs and inventory shortages of critical medical equipment. The US government reportedly has almost depleted it’s emergency stockpile of masks, respirators, gloves, and gowns.
Still — essential companies such as ones producing food, medical supplies, or supporting necessary infrastructure and distribution of supplies are up and running. Leaders of these companies face a whole new realm of challenges as the health of workers and creating and maintaining a safe environment become top concerns.
Our world, our universe is characterized by constant change. Stars are born and die, storms transform the landscape, nations rise and fall, people change over time. In the business world economies grow and collapse, business models evolve, industries transform and even the Top 100 list of leading companies completely changes in a matter of a few years.
But sometimes the speed and scope of change is extremely rapid, its consequences unforeseeable and unpredictable. This makes planning and decision making highly risky because it is so difficult to see what the future holds. “Everybody has a plan,” said championship boxer Mike Tyson, “until they get punched in the face.”
To help explain the often sudden, fluid, rapidly evolving and dynamic forces of change – that “punch in the face” — the U.S. Army War College created the term V.U.C.A. to describe and ultimately deal with highly dynamic, shifting and challenging situations.
U.S. Banks are growing concerned — if not alarmed — and are reevaluating just how lax they are when it comes to handing out commercial loans. With sour loans on the rise, that’s not a pretty picture for companies that rely too much on credit lines or commercial loans. This is, in essence, a self-imposed business risk, as they are more dependent and susceptible to any fluctuations that occur.
A recent Financial Times article reported that non-performing loans increased by 20% at ten large commercial lenders. How much of an impact is that on the bank industry exactly? According to the Financial Times analyst, that’s a hefty $1.6B in the first quarter alone, a significant shift from credit quality since 2016, an era where the dust had settled from crashes and subsequent defaults on loans. The future started looking bright. Lending portfolios and credit quality began to improve.
With merely three years of positive momentum, fast forward to present day and all that has changed and not for the better. “Since most businesses utilize a credit line or other commercial loans, any slowdown will impact all types of commercial lenders – banks, asset-based lenders and factors,” said Yoav Cohen, an interim executive who has spearheaded eight turnarounds and liquidations, each one successful in paying off secured lenders in full. Cohen has seen it all, serving in roles as varied as interim CFO, COO, and a Chief Restructuring Officer.
We were having a conversation with an executive recently who shared about their experience parachuting into a business that was struggling with operational inefficiencies.
This executive, like many interims, kicked off the assignment by meeting face-to-face with the management team and employees to learn how the business functions, what’s working, and what isn’t. Their findings would turn into an operational roadmap of the business, where they would set out and implement a go-forward plan. When meeting with one team member and learning about what they did, the executive pointed to a process they had in place asking “why do you do that?”
The answer: “Because we’ve always done it that way”
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