During a corporate crisis, many things change, including the relationship between the company and its financiers. Internal regulatory requirements lead to changes vis-à-vis lenders' engagement strategies and new contacts. Communication requirements also increase in many respects. Those who fail to recognise this risk a communicative downward spiral and thus potential existential consequences.
Why is correct crisis communication so crucial for a successful restructuring? And how does it work exactly?
Ralf Ehret, enomyc Partner and Head of Debt Advisory, looks at five typical pitfalls of communication with financing partners - and how you can avoid them.
1. Fixate on the usual contacts instead of adjusting to new ones
For many years, companies have grown accustomed to preferential treatment from their financing partners and to having their wishes fulfilled courteously. Often, advisors are "part of the family". And so it is only natural for companies to fall back on the same contacts during a crisis. They expect their familiar contacts will continue to work tirelessly for the company. Unfortunately, this is a deceptive hope:
The classification of "risk case" sets regulatory processes in motion at the offices of the financiers, followed closely by a comprehensive reorganisation of their operational responsibilities. The previous contact persons lose all responsibility over continued engagement, and their further influence is excluded by regulation during the crisis phase. The general commitment strategy and all credit decisions are made by new risk specialists: They also completely take over customer service. It becomes problematic if companies nevertheless continue to rely on the support of their usual contacts.
The sooner entrepreneurs realise that the previously relied upon automatic mechanisms no longer work, the sooner they will accept the changes in responsibility and the greater their chances become of quickly entering into a relevant and constructive dialogue with the new contact persons. At the same time, companies must recognise that the changed risk situation also entails a need for much more intensive and extensive communication. The new contact persons rightly expect to be provided with all the information they now need to both assess the initial situation and to develop preliminary concepts for relevant measures in a timely and thorough manner.
Therefore, full acceptance of new contact persons is an essential prerequisite for functioning communication with financiers. In combination with an increase in the quality of information, this enables the restructuring process to run as smoothly as possible.
2. Well meant is not automatically well done: Why blank activism destroys trust
The most important currency during a crisis is trust, and companies lose this in no time if they repeatedly communicate in an unstructured and vague manner. If they make contact with new advisors in an ill-considered and insubstantial manner, companies risk being perceived as unprofessional. The resulting effect on the financier‘s side is often additional uncertainty. It appears to them as though the company lacks problem awareness and solution competence.
Action devoid of content destroys trust. In contrast, the combination of sovereign stakeholder management and a well-founded information policy builds confidence - especially during a crisis. This leads to trust-building and constructive communication between all parties involved in the process.
In such a critical situation, companies should ask themselves: How, with what goal, in what order, with what information and with what concrete proposals in terms of time and content do we want to approach the financiers?
So instead of going into individual financier meetings spontaneously and unprepared, it is better to consider what information your financiers need now. The key questions are: What effect will the information have on my interlocutors, and what would I ideally like to achieve with my communication?
3. Severe salami tactics: Downplaying existing problems or deliberately withholding details
During the restructuring processes, talking down acute problems and one's own mistakes - or even keeping quiet about them - is often referred to as an "awareness crisis". This can even be the most dangerous of all corporate crises because it stops the company and its financing partners from sharing a clear vision of the initial situation and, consequently, the necessary countermeasures.
Withholding relevant facts or hesitating to disclose information impedes the process flow when it comes to an orderly and coordinated approach. Companies waste precious time with such salami tactics. As a result, necessary measures can only be examined and decided upon by financiers with a delay and under increased time pressure. This can cause considerable additional damage to the company and deprive it of urgently needed liquidity or other resources. In extreme cases, such behaviour by the company could make any non-insolvency rescue attempt impossible.
Open, transparent and timely communication with the financing partners is imperative and absolutely without alternative.
Therefore, always approach your financiers in good time and with all relevant information. Also, make sure to inform them without being asked when it comes to possible new findings or circumstances that lead to a changed starting position. Look for suitable solutions together with the financiers.
4 Unrealistic promises and missed deadlines: Why companies should think carefully about the commitments they make to financiers.
If promises and deadlines around payments are not kept, the liquidity concept of the company collapses relatively quickly, and there is no plan B. This is why it is important to not make promises regarding content and time if you do not have full control over the reins.
Therefore, do not make any promises regarding content and time if you do not have unrestricted hold of the reins in your hands. Otherwise, you run the risk that these broken promises will fall heavily on your shoulders at the worst possible time and irreparably damage your trust in the management. It is advisable to look at statements concerning payment dates conservatively and to make them with due caution.
Always be critical and realistic when making relevant forecasts and promises. Financiers will judge companies precisely on whether they keep their word and how realistic their promises actually are. Financiers' risk managers appreciate this and reward this behaviour with a leap of faith.
5. Grant a material advantage to individual financiers without taking into account the interests of creditors.
It becomes similarly critical when companies give the loudest financier a one-sided advantage at the beginning of a crisis. This happens, among other things, through uncoordinated partial repayments of loans or individual collateral agreements that disadvantage other creditors materially.
Particularly when in a crisis, it is imperative to act with necessary foresight. It does not benefit the company to favour particularly loud, individual creditors, as this makes the overall situation even more complex and harder to control.
The preferential treatment of individual creditors leads to a confrontational negotiation situation with the other financiers, making urgently needed unity and equal treatment among the parties involved in the process more difficult to obtain. The resulting damage to trust is usually irreparable. Restoring equal treatment of all financiers becomes extremely difficult due to the unequal treatment of the preferred creditor, which is usually already contractually fixed.
Never give in to pressure from individual financiers. In the case of such demands, it is better to bring all creditors to the table. This is the only way to ensure that no one receives uncoordinated material benefits that may disadvantage other stakeholders. If there is yet to be a chosen syndicate leader of the financier group, you should actively initiate this. It facilitates communication with the financiers and prevents individual creditors from ruthlessly asserting their particular interests.
Mastering the changed communication with financiers during a crisis is a complex and highly sensitive management task. It is therefore extremely important, especially at the beginning of a crisis situation, that managers deal intensively with the altered situation and the resulting consequences for communication with financiers.
Involving external specialists can prove to be very useful: They support the company - beyond communication with the financiers - in securing the overall financing for the upcoming restructuring phase. They also bring with them privileged access to the new decision-makers, that is, from the risk side of the financing partners. Debt advisors act like guides, accompanying companies safely and professionally through sensitive crisis phases.
What questions do you have about debt advisory and successful crisis communication with financing partners? Get in touch with us! We look forward to hearing from you.