More than 35 private equity-backed companies filed for bankruptcy in 2008, and events so far this year indicate that even more could be going under in the near future. As such, public and media relations professionals representing private equity firms should be prepared for dealing with new kinds of communications challenges for clients normally accustomed to secrecy.
Among some of the largest bankruptcies seen this year include Canadian door maker Masonite International, which cost Kohlberg Kravis Roberts its $429 million equity stake when it filed for protection in the US and Canada in March. Lone Star-backed supermarket chain Hi-Lo and Sun Capital Partners portfolio Drug Fair Group have also filed for Chapter 11 recently.
Amid heavy debt obligations by portfolio companies, such events are likely going to be something that more firms – and their communications departments – will have to deal with. “It's fair to expect that most major private equity firms at one time another in the current cycle are going to have at least one portfolio company that has the potential to file for Chapter 11 in order to restructure its debt,” said Michael Freitag, a partner who leads the reorganization and restructuring practice for public relations firm Kekst & Co.
Kekst represents a number of private equity firms, and Freitag says when providing counsel on how to respond publicly to a potential bankruptcy, each situation requires its own unique strategy. “There are a number of factors that go into it,” he said. “For example, is there publicly traded debt involved? Because there are certain public disclosure requirements for a portfolio company that has publicly traded debt versus one in which the debt is privately held and in which communications can be handled in a different way.”
Freitag says there will be times when it is appropriate to engage in private talks with lenders and times when it necessary to go public with the information, while communications should be crafted with the right audience in mind.
“The portfolio company has the more immediate communications needs, as it must communicate with all of its audiences – suppliers, customers, employees,” he said. “For the private equity firm the concern is for the usual audiences – the limited partners, lenders, deal sources – and so at that level it is more about maintaining credibility, helping to explain what's going on with a portfolio and managing existing relationships in a responsible way.”
In the UK
While PR people have to contend with such issues in the US, the communications situation in the UK is different based on the two countries' view of bankruptcy, said Clifford Chance partner Mark Hyde. “In the UK formal insolvency processes are rarely used to facilitate restructurings, and indeed many restructurings are concluded because of the threat of an insolvency filing. When you get to the formal insolvency process, you don't have very detailed plans, disclosure statements and the like, and in fact when you go through a pre-packaged process there is absolutely no prior publicity,” he said. “The private equity house may issue its own release saying it's been able to restructure its portfolio company X successfully and had made a new equity injection of Y, and the company will move forward.”
Bernard Bollinger, a partner at law firm Buchalter Nemer, said when coming up with a communications strategy for a portfolio bankruptcy, the initial set statement should always be a “no-comment” until the client is contacted and gives the approval to talk to the press. After that there are usually no restrictions on what a PR person can say until the bankruptcy process moves into the plan of reorganization stage and a disclosure statement is filed.
Since the disclosure statement is supposed to be the sole source of information for creditors to judge whether or not they should vote for against a plan of reorganisation, a PR person should be careful not to contradict anything in it. “The disclosure statement is a very informative document, it can often be hundreds of pages long, so if you did anything more than refer them to the disclosure statement it might have the potential for causing problems,” Bollinger said. “But it would be more helpful to refer them to the disclosure statement than to give a ‘no-comment’.”
Bollinger adds that communications representatives should be careful not to be in the “spin zone”. “If you mislead the creditors in the workout process it can have some very negative implications if the case goes to bankruptcy, because you get into issues of distrust, and that can cause the reorganisation process to be more costly and time-consuming,” he said. “I have certainly seen a creditor body be more aggressive in a bankruptcy case as a result of believing they had been misled.”
While PR people have to contend with such issues in the US, insolvencies are resolved outside the courts in the UK, which leads confidential negotiations and leaks to media such as Debtwire. Clifford Chance partner Mark Hyde said such leaks are much more prevalent now than 10 years ago.
As it can be quite an adjustment for some private equity firms to find themselves in the Chapter 11 process, it would not be premature to start the public relations process three or four months before it looks like there might be a filing in order to ensure that the disclosures that will be made to the public are transparent and won't mislead creditors. Freitag says there will be times when it is appropriate to engage in private talks with lenders and times when it necessary to go public with the information, while communications should be crafted with the right audience in mind.
“The portfolio company has the more immediate communications needs, as it must communicate with all of its audiences – suppliers, customers, employees,” he said. “For the private equity firm the concern is for the usual audiences – the limited partners, lenders, deal sources – and so at that level it is more about credibility, helping to explain what's going on with a portfolio and managing existing relationships in a responsible way.”