Deloitte T&R Newsletter

Views from our leaders

Matt Fleming, Senior Manager

With the uncertainty of the current US economy due to inflation, interest rates and waning demand, among other things, credit markets and liquidity remain tight resulting in more companies exploring restructuring options. Its wildly believed that during the next year, there will be a significant increase in the number of businesses that will seek to reorganize under Chapter 11 of the US Bankruptcy Code (Chapter 11).

As businesses evaluate and implement a restructuring under Chapter 11, the related accounting impacts have, in many cases, been an afterthought. This adds undo stress on the management teams and, at times, complicates the process of obtaining accurate financial information. Having the accounting team involved at the start can help reduce the risk of potential undesirable accounting outcomes that will live for years after the Chapter 11 process has been completed.

Accounting for the Chapter 11 process requires a deep understanding of the legal process, understanding the various cutoffs required during the Chapter 11 proceeding, and recording complex transactions under accounting guidance most people have never seen and may never see again in their careers. Recording the emergence from bankruptcy is one of the more complex and demanding accounting challenges an organization may face. It places significant demands on the management team to contend with the equivalent of a year-end close upon emergence, address restructuring of legal entities, account for the impacts of a complex plan of reorganization, adopt the requirements of FASB Accounting Codification 852 “Reorganizations” (ASC 852), and establish the opening balance sheet of the successor organization, which typically includes a remeasurement of all an entity’s assets and liabilities should Fresh Start accounting apply.

The upside is that Fresh Start accounting gives companies emerging from Chapter 11 bankruptcy a chance to continue business with a clean and newly valued balance sheet. However, coordinating all of the elements that need to come together as of the Fresh Start reporting date can be more complex than what even the most seasoned CFOs and other senior accounting personnel could imagine. Time frames are extremely tight and hidden valuation, accounting, systems, tax, and reporting issues can make the process challenging.

Deloitte’s bankruptcy and Fresh Start accounting team has significant experience and has been assisting companies to plan and undertake this significant accounting event. Our team has deep experience in bankruptcy and emergence accounting and can help organizations significantly improve an emerging company’s ability to issue accurate and timely financial reports as well as limit the many pitfalls companies may have to deal with long after its restructuring efforts are over.

Recent engagements

Shipping company

Based on an increased focus due to the impacts of COVID-19, a multi-billion dollar transportation company recognized an opportunity to improve its cash conversion processes and engaged Deloitte T&R to help it improve its working capital performance. With a target of more than $500 million in savings, the increased cash can allow the company to make other strategic investments and technology upgrades.

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Clothing retail chain

Deloitte provided bankruptcy accounting, financial accounting and reporting, valuation, tax, process and systems services to a large retailer with a significant number of North American locations. Our efforts were key in assisting the company to sell off the majority of its assets and operations as well as spin off a large portion of its real estate into a new Securities Exchange Commission-registered reporting entity.

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SaaS Technology Company

Deloitte T&R serves as financial advisor to a private equity–backed technology company that has integrated multiple acquisitions over the last year. The company has engaged Deloitte T&R to help them focus on identifying and achieving working capital improvements across the business focused on the procure to pay and order to cash processes. An initial assessment identified up to a 30% improvement opportunity to reduce their accounts receivable (AR) balance and up to a 50% opportunity to increase accounts payable (AP). To date, the company has achieved a 10% reduction in AR and a 30% improvement in AP.

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Engineering and construction company

Deloitte T&R assisted the executive management team in evaluating strategic alternatives around the issues of operating challenges and management changes that the company was facing, as well as potential sale scenarios. Additionally, Deloitte T&R helped the financial management team with analyses to isolate root causes of underperforming projects, evaluate liquidity sufficiency and bonding capacity needs, and elevate the quality of financial performance. The supporting analysis work shifted to assist management in the company’s needs of diligence responses to interested buyers. Further analysis of long-term incentive plans led to better retention during the sales process. Deloitte T&R remains an adviser to the executive management board around complex issues.

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Strategic aviation lending syndicate

Deloitte teams from the United States and Europe were retained by the lending syndicate (located in London, Paris, New York, and Toronto) to a large global aviation finance company, reeling from the impact of COVID-19 and choking off 90% of its income, and the precipitous downturn of the airline industry. Working closely with counsel, Deloitte assisted with restructuring negotiations on behalf of these lenders and between the lenders, bondholders, shareholders, and borrower. Our ability to bring to bear specialist industry sector experience, contingency planning, and deal implementation experience was pivotal in achieving an effective outcome for our clients.

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Paper Products

Pursuant to its obligations under the Credit Agreement Amendment, the company engaged Deloitte T&R to provide services as the company’s chief strategic officer (the CSO). Deloitte T&R will work collaboratively with management and the company’s investment banker, coordinating with the company’s other restructuring professionals, attorneys, and financial advisors to assist in implementing selected restructuring strategies, including; assessing the company’s business plan and operations to identify potential performance improvement initiatives, developing and implementing the company’s financial and operational turnaround strategy and associated activities, overseeing the management of the company’s liquidity issues, and managing the relationship with the company’s lenders and creditors.

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Wind-down advisor

Deloitte T&R currently serves as the advisor to a manufacturer and its international union as they shut down a joint training and human resources center. Deloitte T&R has developed a work plan and cash flow estimates / budget for the wind-down period and advised the client on various wind-down matters, including, asset sales and transition, document and information retention, and contract disposition.

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