Economic upturn maybring more bad news

The number of insolvenciesin this recession in the USand the UK may – so far –be smaller than expectedbut some think this may bethe calm before the storm.

A rise in interest rates oneither side of the Atlantic,or continuing high oilprices, could tip many com-panies over the edge.

Paradoxically, a freeingup of credit markets couldresult in an increase in thenumber of bankruptciesbecause owners could seean exit strategy.

In the US, the fate of Bor-ders, the bookstore chain

that filed for bankruptcylast month, is the latestevent to show how therecession has changed thehigh street.

The recession particularlyhit sectors such as banking,manufacturing, construc-tion, property and media.

The number of corporatebankruptcies actuallydropped last year fromabout 61,000 to about 56,000,the first decrease in fiveyears. Of these, industryexperts say there have beenfewer “mega-bankruptcies”of the size of GeneralMotors and Lehman thanmany had expected at thestart of the crisis.

Even the increase in busi-ness bankruptcies in 2009 –up 40 per cent on 2008 – wasmodest compared with the61 per cent increasebetween 2007 and 2008, andin line with the 43 per centincrease from 2006 to 2007.

Mark Berkoff, chairmanof the financial restructur-ing and bankruptcy group

at Neal, Gerber & Eisenbergin Chicago, explains that,counter-intuitively, therewere relatively few largeChapter 11 cases at thepeak of the financial crisis.

Lenders preferred to deferbankruptcies and extendloan terms, since businessvaluations were so low.

“Bankruptcy is an expen-sive business tool,” MrBerkoff notes. “It onlyworks if there’s an exitstrategy – typically, eitherreorganisation or sale.”

Although the volume ofbankruptcies slowed lastyear, the trend could yet bereversed. If oil prices stayhigh, industries such astransport could be affected.Moreover, if US interestrates were to rise sharply,many debt-laden companiescould find themselves fur-ther under pressure.

In addition, Aaron Ham-mer, head of the bank-ruptcy group at Freeborn &Peters in Chicago, saysbanks appear to be increas-

ingly unwilling to toleratebad loans on their balancesheets, which could signalan uptick in Chapter 11filings. He notes the pace ofbankruptcies appearshigher so far this year com-pared with 2010.

Mr Berkoff echoes that,predicting the economicrecovery could lead to awave of bankruptcies. “Ifthere’s more liquidity avail-able, you’ll see more bank-ruptcies,” he says. “Itwould become a viable busi-ness tool because debtorswould have exit strategies.”

The picture in the UKappears to be similar.

Fewer companies havecollapsed than might have

InsolvenciesHal Weitzman andDaniel Pimlottlook at the effectof recession ontwo of the world’sbiggest countries

A high­profile casualty

Continued on Page 4

BUSINESS TURNROUNDSFINANCIAL TIMES SPECIAL REPORT | Monday March 14 2011

www.ft.com/business­turnrounds­2011| twitter.com/ftreports

Happy days are put on hold

The new year has potentiallyheralded a fresh start for thecorporate world. Many compa-nies are emerging from the

“great recession” with stronger bal-ance sheets, record cash piles, and –possibly – the worst of the crisisbehind them.

“Companies have weathered thestorm, reduced costs, shed non-coreassets, and managed working capitalbetter,” says Peter Briggs, managingdirector of Alvarez & Marsal, the spe-cialist restructuring firm.

“They have been given no freshmoney, but they have survived bypushing the day of reckoning on theirdebt maturities further out. That hassuited both banks and companies.”

There are still some potential debtrenegotiations that are catching theheadlines. Punch Taverns, a UK pubcompany, Endemol, a Dutch broad-caster and Eircom, an Irish telecomcompany, are just a few situationswhere companies have hired bankersto assess their options.

But the number of restructurings iswell below its peak in Europe in thefourth quarter of 2009, according todata from LCD, the debt specialist,part of Standard & Poor’s. While thereare still some restructurings to beworked through, many restructuringspecialists say the market is quietagain.

“There is still a small number oflarge restructurings working throughthe market, but otherwise the level ofrestructuring mandates is down onthe past year to 18 months,” saysPeter Marshall, co-head of Europeanrestructuring at Houlihan Lokey. “Iexpect we will continue to see a muchlower level of activity. A big focuswill be on companies’ ability to refi-nance maturities in 2012 to 2014.”

Philip Davidson, global head ofrestructuring at KPMG, says that inthe US the restructuring market is thequietest it has been since before thesummer of 2007, a result in part ofabundant liquidity.

“Over the past six months insolven-cies have fallen further,” says Mr Dav-idson. “That should be taken as agood sign, but while you would nowexpect people to become bullish aboutthe recovery, oddly that is not thecase. I don’t detect any optimism. Peo-ple are just waiting and seeing. Therearen’t signs of growth emerging.”

And investors in distressed debtpaint a similar picture.

“With banks patient and economicgrowth better than expected, refinanc-ings are dominating at the moment,”says Theo Phanos, founder of Trafal-gar, a credit fund. “Tough restructur-ings and true distressed situations arecurrently modest in number.”

There are, however, concerns aboutthe outlook. In particular, these relateto a possible oil price shock driven byrecent instability in the Middle Eastand rising interest rates.

“People are desperately worriedabout the impact of governmentspending cuts, rising unemploymentand interest rates,” says Mr Davidson.“The fear of rising interest rates hassignificantly curtailed corporateenthusiasm to spend and the sameapplies to individuals. We are in realdanger of knocking along the bottomin the doldrums for an extendedperiod of time.”

Mr Davidson believes this yearcould be a repeat of last, with manycompanies that have been hanging onfor the recovery starting to comeunder pressure.

Alan Bloom, global head of restruc-

turing at Ernst & Young, says risingrates will increase the number of com-panies that need to be restructured ormay fall into insolvency.

“Until now, it has largely been thehistorically low interest rate environ-ment that has kept many businessesafloat,” says Mr Bloom. “Any businessdependent upon the consumer is find-ing it tough in the UK.

“With increased commodity pricesand the prospect of significant redun-dancy arising from the governmentcuts, the consumer is having to be farmore discerning. A lot of our activityis in areas that are dependent upondiscretionary spend – hotels, leisure,being particularly prevalent.”

For many companies, there are stillchallenges ahead. While credit mar-kets have reopened to many compa-nies, Mr Bloom believes the availabil-

ity of credit for all but the best com-panies is scarce.

“The strong have definitely gotstronger in the past two to threeyears, have taken some tough deci-sions and are now well positioned forgrowth. The weak, on the other hand,have suffered very considerably andin many economies we are experienc-ing a much greater disparity betweenthe strong and the weak,” he says.

Donald Featherstone, partner atAlixPartners, another turnround spe-cialist, expects that eastern Europeand the Middle East will see a robustand sustained level of restructuringactivity.

Many companies battened down thehatches to get through the recession,but the situation is now different.

“This financial crisis has had every-one’s attention, but the world has not

stopped changing,” says Mr Briggs.“So just having an economic recoveryalone doesn’t help companies; theytoo have to change. For restructuring,there’s a balance sheet aspect andincreasingly a focus on whether youhave a competitive business and havekept up with the developments inyour industry, while you’ve been hun-kering down financially.”

One of the questions those busi-nesses may face is whether to movecapacity or distribution to low-costregions to be competitive.

And it is not just cost pressures thatcompanies face. Technology and pat-terns of consumer demand havechanged, and advisers say companiesneed to react to these changes.

“The message is ‘reinvent or die’,”says Steve Frobisher, business turn-round expert at PA Consulting Group.“Most companies are not the lowest-cost producer in their sector and thesebusinesses face the risk that their cus-tomers have already changed theirbehaviour.

“The key to reinvention is to createa portfolio of winning businesses.Companies must refocus on potentialwinners, harvest capital from value-diluters, right-size their capacity andexit likely losers.”

Mr Featherstone at AlixPartnerssays he sees market leaders consoli-dating, in particular in the oil and gassector and shipping.

“Corporate restructurings are pro-viding a number of opportunities forstronger players to acquire marketshare at relative attractive price,” hesays.

One pressure for companies will beany impact on consumer demand.

The recovery in credit markets hashelped eat away at the wall of maturi-ties that companies face. One bigfocus for restructuring bankers is awave of debt maturities coming due incoming years.

“Despite an unsettled global econ-omy, pent-up liquidity in the debtmarkets is making this a goodtime for many companies torefinance,” says Christian Savvides,

managing director at Rothschild.“However, the outlook is still uncer-

tain for those that are overleveraged,underperforming or in difficult sec-tors and in some cases looming debtmaturities will trigger restructuring.”

Dan Schwarzmann, partner andbusiness recovery services leader atPwC, says companies need to pre-empt what their banks and otherstakeholders are looking for.

“Regular dialogue and relationshipbuilding with key stakeholders needsto happen to understand fully their

Restructurings are downand refinancings aretaking centre stage, butthere are concerns aboutthe outlook, writesAnousha Sakoui

‘People are desperatelyworried about the impactof government spendingcuts, rising unemploymentand interest rates’

Balancing act: Endemol, the company behind Wipeout, has hit the headlines in recent months. Shown is the US version, produced by ABC Getty

pressures and how they might impactcompanies’ objectives,” says MrSchwarzmann.

“Companies should also keep an eyeon the basics, which are often over-looked. Many companies focused oncash management when the crisis hit.

“However, where increased scrutinyfrom stakeholders is expected, compa-nies should ensure that forecasts andreporting are accurate and robust andallowances are made for pressuressuch as interest rate and commodityprice rises.”

Inside this issue

Container shippingLessons in navigation are yet tobe put to the test – the sector’srocky times may not be overPage 2

BanksRush to sell non­core assets risksflooding the market: anexamination of the difficulties ofwidespread restructuring Page 2

RefinancingThe day of reckoning may be athand for the ‘have­nots’.Overleveraged companies facebattle with gravity Page 2

European constructionThe prospect of recovery heraldsnew threats – a ‘flight to quality’will present a risk to smallergroups Page 3

UK propertyInsolvency is the last resort forthe sector. Further action bybanks on problem loans is inprospect Page 3

‘Pre­packs’An important weapon in thearmoury. Pre­packagedadministration has become moreaccepted Page 4

General MotorsThe ups and downs of havingUncle Sam come to the rescue.The carmaker comes back fromthe dead Page 4

Reader’s DigestThe debt­laden US mediacompany fell victim to theadvertising recession in 2009. Itsrecovery was complicated by apension fund issue in the UKsubsidiary, which is now undernew ownership Page 4

2 ★ FINANCIAL TIMES MONDAY MARCH 14 2011

Business Turnrounds

ContributorsAnousha SakouiCapital Markets Reporter

Salamander DavoudiMedia Correspondent

Sharlene GoffRetail BankingCorrespondent

Ed HammondUK Companies Reporter

Jennifer HughesSenior MarketsCorrespondent

Dan PimlottEconomics Reporter

Bernard SimonNorth American MotorIndustry Correspondent

Daniel ThomasCommercial PropertyCorrespondent

Hal WeitzmanChicago Correspondent

Robert WrightTransport Correspondent

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising contact:Robert Grange atrobert.grange@ft.com

Day of reckoningapproachingfor the have­nots

Rush to sell non­core assetsrisks f looding the market

Lessons innavigationyet to be putto the test

Banks around the world aretaking an increasinglyaggressive approach torestructuring their busi-nesses in the face of an eraof constrained profitabilityas tougher regulation startsto bite.

Many of the US and Euro-pean banks that were hithardest in the financial cri-sis are already deep intodrastic overhauls that willsee them shed hundreds ofbillions of dollars ofunwanted assets over thenext few years.

Now that the immediateaftermath of the crisis isbehind them, banks arebracing themselves for asea change in regulatorylegislation that will demandthey hold far higher levelsof capital against theirrisky assets.

Even the banks that didnot require state bail-outsare looking to rebalancetheir businesses by cuttingcapital-intensive activitiesand taking a more scrupu-lous view of the returnsgenerated from individualdivisions.

Daniel Meere, a financialservices specialist at PAConsulting, explains that

the banks’ restructuringefforts fall into two catego-ries.

“First, those imposedby regulators or as a condi-tion of public ownership,for example offloadingbranches or specific busi-ness units. Second, thosethat address strategicimbalances, for examplecutting back operations innon-core markets,” he says.

The latter is largely aresponse to increased pres-sure on profitability.

During the recent resultsseason, a disconcertingtrend emerged for bankinvestors.

While banks mainlyreported considerably im-proved performances for2010, as loan impairmentsfell sharply, the news wascountered by a number ofdowngrades to their futureprofitability targets.

Credit Suisse, the Swissbank, together with Bar-clays and HSBC in the UK,cut their expectations fortargeted return on equityby up to a fifth, while manyof the big US banks alsomade moves to temperinvestor expectations.

These banks are targetinga return on equity of up to15 per cent compared withprevious expectations of anumber in the top teens.

“Poor underlying coreprofitability is a criticalissue,” says Steven Pearson,a business recovery partnerat PwC.

“Extensive and ongoingcost reductions, as well asincreases in product pric-

ing, will be required toensure the banks candeliver sustainable profitgrowth.”

In the UK, the profitdowngrades have followed awave of managementchanges in recent months.Barclays and HSBC bothpromoted the heads of theirinvestment banking divi-sions to become the chiefexecutive at the start of theyear, while Lloyds broughtin a new head this month.The new bosses havelaunched root-and-branchreviews of their businesses.

As well as strengtheningtheir capital bases andboosting profitability, banksare also having to reshapetheir funding profiles, asthey attempt to meet newregulations requiring themto hold a greater proportionof liquid assets.

Many are simultaneouslyweaning themselves offcheap central bank finance.

While significant changesare afoot in banks such asBarclays and HSBC, themost radical restructuringsare taking place at institu-tions that required directgovernment bail-outs.

These banks are havingto shrink their balance

sheets drastically, siphon-ing off huge portfolios oflegacy loans that triggeredlarge losses.

As stricter regulationthreatens to make certainassets more expensive tohold, some banks are tryingto pick up the pace ofrestructuring this year.Royal Bank of Scotland, forexample, the UK bank thatis 84 per cent owned by thegovernment, is two yearsinto a five-year plan to sellor wind down £250bn worthof non-core assets.

In February, it announcedit had made faster thanexpected progress last yearin reducing non-core assetsand it cut the target size ofits non-core asset base thisyear from £118bn to £96bn.

Another development isthat, as the global economystarts to get back on itsfeet, banks are having moresuccess in finding buyers.

Citigroup, the US bank,which is working its waythrough a mammoth dis-posal programme that willsee it remove more than$800bn (£500bn) of non-coreassets, recently sold to Bar-clays its portfolio of 1.15mEgg credit card customers,which had been on theblock since last summer.

Citi has now sold morethan $400bn of assets sincethe first quarter of 2008.

However, efforts tospeed up asset sales arethreatening to flood themarket with buying oppor-tunities, potentially trigger-ing a downward spiral ofprices.

Already one of the largestbank restructurings – thattaking place in Ireland –has been put back becauseof a lack of appetite. amongbuyers.Irish lenders arebeing forced to sell as muchas €140bn of assets, includ-ing portfolios of mortgagesand small business loans inthe UK as they shrink theirbalance sheets to a moresustainable level.

But the authorities havepushed back the disposal,as they fear that sellingnow would trigger toosevere a loss for the banks.

“A lot of loan assets areavailable to investors,which has served to driveprices down and make dis-posals more difficult tocomplete for value,” saysMr Pearson.

“Losses on any sales willlikely require new capital,which is priced at a pre-mium to historical levels.”

BanksSharlene Goffexamines thedifficulties of suchwidespreadrestructuring

When Del Monte came tothe market last month witha $4.75bn bond offering tofund its buy-out by Kohl-berg Kravis Roberts, thedeal was notable for morethan just its size or thestoried names it involved.

Included in the offeringwere so-called “cov-lites” –bonds with few restrictionson the borrowers that hadcome to symbolise theexcesses of the pre-crisiscredit bubble.

The US food group is notalone. So far this year, cov-lite loans have accountedfor about a quarter of allnew US leveraged loans – arate above the level reachedin their 2006 heyday.

With junk-rated bondissuance running at recordlevels and the return of cov-lites, it could appear as ifthe financing woes of strug-gling companies are over.But that would be a mis-take; watchers warn thatthe real “credit crunch”may be only just beginningfor many groups.

“There’s a huge spike incompanies’ refinancingneeds and, at the sametime, banks are still havingto deal with their own regu-latory capital position, sowe’re talking about a realsupply-demand imbalancefor capital,” says KeithMcGregor, a partner inErnst & Young’s corporaterestructuring practice inLondon. “In lots of waysthere is still a real battle forcapital and it is only justbeginning to heat up.”

Banks’ own struggles arewell known, but as Mr

McGregor says, those prob-lems are still very muchpart of the landscape, aslenders try to shrink theirexisting loan books, letalone raise the funds fornew loans.

This is particularly acutein Europe, where manymidsized companies havetraditionally relied on agroup of banks rather thanthe capital markets, only tofind their former friends arecool on the idea of freshfinancing.

For the better positionedcompanies, the market iswilling to provide newfriends. Household namesand those with stronginvestment stories can tapprivate placement specialistinvestors or, if their needsare big enough to interestthe public markets, selljunk bonds. They have beendoing this in recordamounts.

But that is only for thebest companies – the“haves”, perhaps, sincethere are also a largenumber of “have-nots”whose day of financial reck-oning could be drawingcloser.

Although default rateshave fallen heavily fromtheir recent crisis peak,many suspect that isbecause lenders have beenprepared to ease covenantsand extend loans in whatthe industry calls “extendand pretend”, or, even morecynically, “delay and pray”.

“Eventually, gravitytakes over,” says PeterBriggs of Alvarez & Marsal,the restructuring special-ists. “If you’re overlever-

aged, you may havebeen able to keepthe plates spinning,

but the banks can’t stretchmuch further for the have-nots. Even as the capitalmarkets come back, lendersare going to have to spendtime on – and invest moneyin – these work-outs.”

The upshot is that thebetter companies faceanother set of competitorsfor what fresh funds areavailable. On top of accept-ing losses on their existingloans, lenders to troubledgroups might have to putup fresh cash to have anyhope of seeing their invest-ment recover fully.

“Most companies havedone all the right things –managing working capital,selling non-core assets – butyou can only do that for solong if you want to growyour enterprise value. Com-panies need to be movingforward at some point,”says Mr Briggs.

Talk of a looming “wall”of refinancing needs hasbeen particularly strong inEurope. From less than€10bn ($13.8bn) this year,refinancing needs will jumpto €40bn by 2013 and leaphalf as much again in 2014,according to data compiledby Fitch and PwC.

“Its going to be abouthow these companies getfrom here to refinancing,”says Heather Swanston, apartner in PwC’s restructur-ing practice. “This meanslooking at operationalimprovements to enhanceprofits and cash, andremoving volatility fromtheir balance sheets.

“Then they need to lookat all sources of financingto reduce their dependenceon the banks – maybe thatmeans asset-backed lend-ing, or perhaps looking atthe high-yield or private-placement markets.”

According to the profes-sionals, a lot of companieshave followed this advice.However, even more havenot fully thought out theiroptions, hoping the creditworld will soon revert tosomething more like itseasy pre-crisis ways.

Advisers concede theirget-started-now exhorta-

tions can appearself-serving, butstress it is impor-tant to do so.

“It is theadviser’s mantra– ‘if only you’dtold us earlier’,”says one. “Butlike all thesee x p r e s s i o n sthere’s truth init. You’ve got notime to waste if

you need financingin this market.”

Refinancing needsGravity may beabout to apply tooverleveragedcompanies, writesJennifer Hughes

As the globaleconomy recovers,banks are havingmore success infinding buyers

PA’s Daniel Meere

In the can: Del Monte’s bondincluded ‘cov­lites’ but othergroups may find it muchharder to raise funds Alamy

The empty, idle containerships that started to fillsheltered bays andunused wharves during

2009 were powerful symbols of atrade slump that took containershipping by surprise.

At the depth of the crisis inthe first months of 2010, theindustry, which had been usedto breakneck growth rates, hadmore than 10 per cent of its shipcapacity sitting unused.

The shipping lines that oper-ated many of the vessels werefaring still worse, as were manyof the ship owners that leasedships to the lines.

Many lines and owners facedthe imminent prospect of insol-vency without support fromgovernments, shareholders ortheir main creditors.

Yet, barely a year after thecrisis was at its worst, the baysand harbours are virtuallyempty of laid-up ships. Many

shipping lines, having sufferedrecord losses for 2009, publishedrecord profits for 2010, buoyedby a sharp rebound in demand.Some ship owning companiesare again considering orderingnew vessels.

However, most observersbelieve the worst downturn incontainer shipping’s 55-year his-tory has left indelible marks onthe industry that will affect pro-foundly how it develops infuture.

Claus-Peter Offen, who ownsof one of the world’s largestfleets of leased container ships,told a conference in Hamburg inFebruary that most owners hadspent the past two years “get-ting the ship around the rocks”.

“Now, when most of us havemore or less settled these proc-esses, we will be starting againand seeing what will be happen-ing in the future,” he told theMarine Money German ShipFinance forum.

Container shipping’s stormbrewed up partly becausedemand to ship containers,which had risen every yearsince the first container shipsailed in 1956, shrank by at least10 per cent in 2009.

It was far more fierce because

the fall came as ship ownerswere preparing to receive awave of huge new ships orderedbefore the sector’s good timescame to an end.

Ship owners not only sufferedfrom the depressing effect ofcapacity expansion on the ratesthat they could charge, but alsostruggled in many cases toarrange finance.

Even ship owners who hadalready arranged the finance fornew vessels faced demands frombanks for extra cash becausethe ships’ falling value reducedtheir worth as collateral.

Robert Yildirim, the Turkishbusinessman whose $500m cashinjection helped rescue France’sCMA CGM, which operates theworld’s third-largest containership fleet, portrays the worst-hitshipping lines as hapless vic-tims of market circumstance.

“We knew the company cameto this position not because of

its fault but because of theindustry situation,” he says ofCMA CGM’s problems. “It was aglobal crisis.”

CMA CGM, says Mr Yildirim,had simply ordered a largenumber of vessels at the wrongtime – just before the economiccrisis hit.

“The vessels’ value wentdown and the company didn’thave enough money to make itup,” he adds.

It was, nevertheless, mostlyaggressively expansionist linesthat faced the biggest problems,as they were forced to financesignificant payments to ship-yards just as they moved intoloss. Many were forced intodevising innovative ways ofreaching a financially sustain-able position.

As well as raising $770m infresh equity through rightsissues, Chile’s CSAV offeredsome of the many Hamburg-

based ship owners from whom itchartered ships equity stakes inthe company in return forreduced day-to-day charterrates.

“Down the road, we see thestakeholders better off thanthey were before the crisis andthe company in a new competi-tive position, looking at itsfuture in a different way,”Rafael Moreira, CSAV’s financedirector, told the Hamburg con-ference.

Israel’s Zim was also forced toask the owners of its charteredships – particularly the Oferfamily, who control the IsraelCorporation, its parent – toaccept reduced charter rates inreturn for equity in the busi-ness.

The company also raised$700m in equity to fund itsambitious fleet expansion pro-gramme.

“We’ve come a long way since

the crisis of 2009,” says AllonRaveh, Zim’s chief financialofficer. “Our financial perform-ance has improved dramati-cally.”

The aggressive lines that raninto trouble in the downturn,ironically now look in far bettershape than the more cautiouslines that avoided the need for abail-out, either because of theirfinancial strength or their smallorder book.

CSAV’s fleet has gone from16th largest at the start of 2009to sixth-largest now, accordingto Alphaliner, the Paris-basedconsultancy.

Denmark’s Maersk Line, oper-ator of the sector’s biggest fleet,has complained about the mar-ket distortions created by thevarious bail-out deals, as well asthe state support extended tosome lines, including Germany’sHapag-Lloyd.

Mr Raveh denies that Zim has

gained special advantagesthrough forcing down its char-ter rates in the depth of therecession.

“Many of the lines renegoti-ated charter rates,” he says. “Idon’t think Zim did anythingexceptional.”

Yet it may not be long beforethe restructured lines have toshow they learnt the lessons ofthe recent downturn and canhandle another one calmly.

Paul Dowell of Howe Robin-son, a London shipbroker,described to the Hamburg con-ference how shipping lines andship owners were awaiting con-tainer ship deliveries that wouldincrease the world’s fleet capac-ity by 24 per cent. Yet, demandto move containers this yearwas expected to grow by only amodest 6.9 per cent.

“Don’t be blinded by theapparent light at the end of thistunnel,” he warned.

Container shippingRobert Wright saysthe sector’s rockytimes may not be over

Port in a storm: the businessman whose $500m cash injection helped rescue France’s CMA CGM portrays the worst­hit lines as hapless victims of market circumstance Getty

Lenders haveeased loans inwhat the industrycalls ‘extend andpretend’ or even‘delay and pray’

FINANCIAL TIMES MONDAY MARCH 14 2011 ★ 3

Business Turnrounds

Prospect of a recovery heralds new threats

Guardian Road BusinessPark in Exeter, in thesouth-west of England,is forgettable in the

way all out-of-town office clus-ters are.

Its roads, punctuated by doz-ens of mini-roundabouts, criss-cross the square mile or so ofgently sloping hillside. Beigecorrugated hangars and glass-clad showrooms nestle behindneat hedges and slivers of lawn.There is not a pedestrian insight.

Yet this unremarkable devel-opment, which overlooks theregion’s main trunk road, hasbeen at the centre of the stormthat has swept through the UK’sconstruction industry for thepast three years – and is mir-rored across the rest of Europe.

Connaught and Rok, two ofthe UK building industry’s high-est profile victims of the reces-sion, were based within a fewminutes’ walk of each other onthe Guardian Road site. Then,during a fateful two months lastautumn, both companies col-lapsed into administration.

The resulting fallout, whichsaw some 14,000 workers maderedundant and hundreds ofmillions of pounds in debt gounpaid, left a trail of bank-ruptcy and financial hardshipat the two companies’ manysmall trade creditors and sub-contractors.

This domino effect along sup-ply chains, combined with fall-ing workloads and squeezedcash flow, has made construc-tion companies acutely suscepti-ble to business failure. Indeed,in the two years to the start of2011, more than 6,000 buildinggroups have fallen into insol-vency in the UK – more thanany other sector, according todata from PwC.

However, while the pressuresof a declining market havetaken a harsh toll on the Euro-pean construction industry, theprospect of a recovery heralds

new and equally perilousthreats to the continent’s build-ers.

The shortage of work duringthe past three years has meantthat a lot of companies havetaken on contracts at minusculemargins, or even at a loss, sim-ply as a way of creating cashflow and utilising workers.

“The idea has always beenthat they are then able to go totheir supply chain with guaran-teed work and orders and drivedown costs to push up the over-all contract margins,” explainsJonathan Hook, global head of

engineering and construction atPwC.

The practice of so-called“suicide bidding” or “buyingwork” was a way for many com-panies to stay afloat during thehardest passages of the reces-sion. Now though, with raw-material costs creeping up andsubcontractors having been“beaten up” on rates for thepast three years, the possibili-ties for clawing back profit mar-gins sacrificed on the originalcontract are evaporating fast.

For construction companies,this poses a tough question:

Does the need to keep generat-ing cash outweigh the risk oftaking on work which is likelyto be lossmaking?

The larger construction com-panies can afford to take onwork on low-margin or lossmak-ing terms for long periods, asmany will be generating profitsfrom contracts negotiated beforethe recession.

However, for the smaller com-panies, which typically work onshort-term projects, the need tomitigate against the risk of mis-judging inflation in the supplychain could prove fatal, as they

are forced to overprice contractsor face possible financial col-lapse.

“The price pressures frombeneath are going to be the big-gest risk to the sector duringthe next two years,” Mr Hooksays.

Construction companies, par-ticularly building contractors,traditionally work on the basisof a large upfront payment forstarting a project, followed by aseries of smaller paymentswhen the work reaches certainstages.

However, this low-risk model,

which Ian Tyler, chief executiveof Balfour Beatty, one ofEurope’s largest constructioncompanies by sales, hasdescribed as “building some-thing with someone else’smoney”, is under threat.

“As construction companiescome out of recession, theyshould, in a good market, get arapid injection of cash asadvance payments are made,”says Jack Kelly, an infrastruc-ture partner at Deloitte.

“The difficulty this timeround could be that customersbecome unwilling to make suchlarge advance payments, espe-cially if there is a lot of competi-tion and the need to offerupfront payments is less preva-lent,” Mr Kelly adds.

Another concern for buildinggroups is the fall in public-sector spending on new con-struction projects, with govern-ments across Europe cuttinginvestment on new schools, hos-pitals, roads and railways asthey seek to tackle debt bur-dens.

The sector has alwaysdepended heavily on state spon-sored contracts, but the pastthree years have seen public-sector projects account for anincreasingly large chunk ofworkloads, as private spendingon construction has fallen.

Now, though, with govern-ment spending on the industryexpected to decline, competitionis rife for getting on to frame-work agreements with localauthorities and winning whatlittle work there is.

As well as the pressure thatincreased competition createsfor smaller builders, there is aflight to quality by customers.The upshot of this is that manyof the biggest spenders on theindustry will avoid using con-tractors that they perceive aslacking financial and opera-tional muscle.

“Having strong relationshipsbetween customer and builder isgoing to be crucial, as peopledon’t want to put money into aproject and then have the con-tractor fall over halfwaythrough,” Deloitte’s Mr Kellyexplains.

European constructionA ‘flight to quality’will present a riskto smaller groups,says Ed Hammond

Concrete corpse: an abandonedbuilding skeleton at Almunecar insouth­eastern Spain Getty

Insolvency is ‘last resort’ forsector weighed down by debt

While the fast-growingeconomies in Asia andLatin America areunderpinning a sense ofoptimism in globalproperty markets, the storyis very different elsewhere.

Along with the US, theheavily indebted UKproperty sector has beenamong the worst hit by thecredit crisis.

The good news is thatthe sector has recoveredfrom the crash in valuesduring the recession butmany fear that addressingthe worst of the problemshas merely been delayed.

The recovery has seenthe number of businessfailures in the propertysector drop over the pastyear by 1.5 per cent inJanuary, according toExperian, the UK-basedinformation servicescompany.

Mark Batten, real estatepartner at PwC, sayscompanies are makingprogress in dealing withdebts. “Lenders aremanaging businessescarefully to find solutionsto help them stay afloat,”he says.

“By and large, they havea good handle on portfoliosand are looking to workthrough problems withtheir borrowers. They areonly resorting toinsolvency as a lastresort.”

But, he adds, the realestate sector was certainlynot out of the woods, anddistressed propertycompanies are stillstruggling to survive at atime when there is no signof widespread valuegrowth.

The biggest problem isthat the value of propertyis still below the level ofdebt in many investmentsmade during the boomacross the UK, particularlyin regional markets thathave regained little ground

since the bottom of thedownturn.

So far, banks have beenloath to take on too manyof the problems, oftenpreferring to extend loansor agree consensual dealsto buy extra time, in partbecause the scale of thelosses would have been toomuch to deal with duringthe recession.

Some insolvencies havebeen prevented byswapping debt for equityin businesses, which hasmeant that banks avoideda loss through a forcedsale.

However, with the UK’sbanking sector returning tostrength, there is theprospect of further actionon problem loans, in theface of adverse economicfactors that will impactrental income. This has sofar helped cover interestpayments.

Lloyds alone, which hasabout £60m of outstandingproperty loans and some£20bn in its businesssupport unit, now hasmore than 400 peopleworking on its real estatebook.

According to De MontfortUniversity in the Midlands,about two-thirds of the£220bn outstanding toproperty borrowers due formaturity in the next fewyears, with some £50bn ofthe total either in defaultor breach of its covenants.

Chris de Pury, real estate

partner at Berwin LeightonPaisner, predicts problemsin future, as banks workthrough loan books andlook to partner with newequity investors at the costof the old borrowers.

“The market has neverreally recovered outsideLondon, but people havebeen able to carry onbecause income washolding up and servicinginterest. Many loans hadthe protection of swapliabilities, which preventedaction.

“But banks are nowstronger, while swap losseshave lessened andrefinancings are comingdue. Banks are prettysensible in how they workout their problems,however. That shouldprevent a flood of salesand the government willbe reluctant to see toomuch pain.”

He says investors arestill sitting on significantcash resources to helpdistressed situations.

Neville Kahn at Deloittesays banks have dealt withthe small number of large

borrowers in trouble, andare now moving to thelarger number of smallerproblem loans. Even so, hedoes not see a widespreadproblem. The problems arenow mostly outsideLondon, he says.

Fraser Greenshields,partner at Ernst & Young,says the “liquiditysqueeze” for secondary,highly leveraged propertyassets is likely to beprolonged.

“Refinance risk isbecoming a primaryconcern for real estateborrowers. The generallack of available credit hasbeen compounded by thetwo largest lenders, Lloydsand RBS, deleveragingthrough the sale of non-core assets. [They] accountfor almost half the £226bncommercial propertylending market.”

Richard Fleming, UKhead of restructuring atKPMG, says there has alsobeen an increase in moreinnovative insolvencypractices, such as companyvoluntary arrangements(CVAs), which wouldcontinue to be case inworsening conditions.

“There was nearlydouble the number ofCVAs agreed by propertycompanies with theircreditors than retailcompanies in the lastquarter.

There is no doubtingthat the property industryfaces some tough negativeeconomic factors; whetherit’s the ever-increasingissue of empty stores onthe high street or thecontinued polarisation ofthe property market.”

Many propertycompanies remain worriedthat such a furthereconomic dip could leadtenants to cut back spaceand demand lower rents.This would hit their ownincome and cause a rise ininsolvencies, as companiesstruggled to pay their debtobligations.

However, the immediateconcern is the refinancingrisk in the sector, givenexpectations that debt willremain scarce in the nearfuture. While the worst ofthe fall-out from therecession may have beenavoided, there are stillsome testing times ahead.

Case studyUK propertyFurther actionby banks onproblem loans isin prospect, writesDaniel Thomas

The recovery hasseen the number ofbusiness failures inthe property sectordrop slightly

Not yet out of the woods: borrowers are struggling Alamy

Another concern forbuilding groups is thefall in public­sectorspending on newconstruction projects

4 ★ FINANCIAL TIMES MONDAY MARCH 14 2011

Business Turnrounds

Upturnto bringbadnews

been expected, given the 6.4per cent contraction in theeconomy. But this good-news may yet mean badnews.

Many “zombie compa-nies”, kept alive partly bylow interest rates, areexpected to die this year.

Overall, insolvencies inthe UK were down 12 percent on 2009 at almost23,000 last year, althoughstill at levels well aboveanything seen since theearly 1990s recession.

In the property sector, liq-uidations more than dou-bled, as estate agents, char-tered surveyors, and archi-tects practices went to thewall. Closely following wereconstruction companies.

Wholesale retail andmotor trades also saw ajump in failures. And man-ufacturing – after construc-tion the sector that sufferedthe deepest recession – alsosaw insolvencies surgesome 50 per cent, althoughthe number is now backclose to pre-recession levels.

Insolvency experts saythere have been fewer bank-ruptcies for three reasons.

First, interest rates are attheir lowest ever level of 0.5per cent.

Second, banks have notbeen calling in bad debts asreadily as in the past, partlyto protect their balancesheets from displaying thetrue size of debts and partlybecause of political pres-sure.

Third, HM Revenues andCustoms has been lettingthousands of businessesdelay tax payments throughits “time to pay” pro-gramme.

However, crisis settingsare set to unwind, and aspolicy creeps back to nor-mal many companies stillstruggling may die.

Brian Johnson, a partner

in insolvency at HW Fisherand Company, suggests thateven a half or 1 point rise inBank rate could push manybusinesses over the brink.

Industry experts say HMRevenue & Customs is get-ting tougher on payments,particularly for repeatrequests for time to paydelays.

“HMRC has toughened upon time to pay,” saysStephen Law, president ofthe R3 bankruptcy industrygroup.

HMRC denies that the cri-teria for time to pay havechanged, although busi-nesses that try to defer fora second or third time mayfind they are subject tomore thorough questioning.

Last but not least, publicsector cuts will have animpact.

R3 estimates corporateinsolvencies will rise to27,000 this year, up nearly afifth from last year’s dip.

“A vast number of compa-nies – call them the walkingwounded, or zombie compa-nies – were allowed to con-tinue to trade,” says MrJohnson.

Usually, insolvencies riseas recessions draw to anend and orders suddenlyrise. Businesses becomecrushed between needing topay for supplies quickly andreceiving payments slowly.

Insolvency practitionersbelieve that wholesale andretail trades are likely tosuffer the most businessfailures this year, followedby construction companiesand hotels and restaurants,according to an R3 survey.

Mr Johnson advises wor-ried companies to makesure they have stocked upon cash.

“The first thing is tocarry out a complete busi-ness healthcheck. Cash isking in most businesses,”he says.

He advises delaying pay-ments, and bringing indebts, focusing on cash flowand reducing costs.

Finally, he advises com-panies in trouble to seekother sources of cash if thebanks will not lend.

“Look for investments.You are not going to getmoney from the banks, soyou might as well give upsome equity to keep yourbusiness going.”

Continued from Page 1

‘The first thing is tocarry out acomplete businesshealthcheck. Cashis king in mostbusinesses’

Important weapon in the armoury

In February this year, aninsolvency brought to anend one of the longest run-ning and high-profile corpo-

rate sagas of the post credit-crisis world. And it took just amatter of hours.

Citigroup, the US bank,announced it had finally seizedcontrol of EMI, the UK musicgroup. On that morning, admin-istrators at PwC had beenappointed to a holding companyfor the group and sold the busi-ness to its lender.

The move brought to an end along-running tussle with the UKgroup’s owners Terra Firma, theprivate equity firm led by GuyHands.

The battle for control hadinvolved Terra Firma injectingmillions of pounds to remainwithin financial covenants,attempts at restructuring negoti-ations, and even a courtroombattle.

But in the end, Citigroup took

control via a pre-packagedadministration – or pre-pack.

It was the UK’s largest suchadministration on record and areminder of the use of this con-troversial insolvency process.

Throughout the crisis, thepre-pack has been a tool manycompanies relied on as a wayto implement restructurings.

Unlike in the rest of Europe,a well tested court-based processis available in England underwhich, if secured lenders agree,a business can be sold to anew owner, potentially wipingout the claims of unsecuredcreditors.

It is a process that many conti-nental European companies havealso made use of by relocatingtheir so-called centres of maininterest to England.

Peter Spratt, a PwC partnerand lead administrator of MaltbyInvestments, an EMI holdingcompany, says: “The EMI case isone of the best examples of whypre-packs are necessary in cer-tain situations.

“The sale . . . had to be quick,so as to minimise the chances ofartists leaving the label, to pro-tect the underlying strengthsthat made the company what itis today and ultimately to pre-serve value for creditors.

“A pre-pack maximised the

certainty of those objectivesbeing met.”

At first, pre-packs had beenseen as controversial, with par-ticular concerns about the treat-ment of unsecured creditors andcases where the business is soldback to the owners.

But the process has evolvedinto a more accepted restructur-ing tool, say advisers. “We havecome a long way in recent yearsin improving the image of pre-packs,” says Mr Spratt. “Theyplay an important part of thearmoury available in restructur-ing businesses.

“As long as the guidance avail-able to insolvency practitionersis followed when considering thekey issues on whether a pre-packis appropriate, then creditorsshould be adequately protectedfrom potential abuse of the proc-ess.”

Another recent example is thatof the East London Bus Com-pany holding company. Adminis-trators at KPMG successfullyused a pre-pack to restructure itsdebt and sell the share capital toStagecoach.

The operating business wascompletely untouched, therewere no redundancies, and littleimpact on the organisation.

“It’s good to see ‘pre-pack’administrations starting to lose

their negative connotations,”says Richard Fleming, UK headof restructuring at KPMG.

“Pre-packs have always beenan important tool in the insol-vency practitioner’s kit. How-ever, a small number of unscru-pulous directors – who used ‘pre-pack’ administrations to get ridof debt and then buy back busi-nesses – had given them a badname.”

Mr Fleming adds that restruc-turing overleveraged companieshas been one of the definingtrends of this downturn and pre-packs have proved an effectivemechanism for achieving that.

“Perfectly strong companies,which could have been draggeddown by their debt, have beenable to move forward with noredundancies or any discernibledisruption to day-to-day businessbecause of pre-packs,” he says.

While it had been expectedthat EMI might not meet its cov-enant test at the end of the firstquarter of 2011, the bank movedquickly to seize control, wantingto avoid the situation beingdrawn out further.

With most pre-packs, a defaultis pinpointed by a test of per-formance-related covenants ornon-payment, but in the case ofEMI the bank enforced a balancesheet insolvency test triggered

by the weight of its £3.4bn debts.Those close to the move

believe one thing that made itpossible was the fact that infor-mation had already been pub-lished about the value of thecompany being well below thevalue of the debt.

Mr Hands himself had previ-ously estimated in court thatEMI was worth just £1.8bn.

After the restructuring, Citi-group said it was writing off two-thirds of its loans to EMI, or£2.2bn.

“People will look at recentcases and be interested to see ifbanks will take a more robustapproach, for example enforcingon a balance sheet insolvencydefault,” says Richard Tett,restructuring partner at Fresh-fields, the law firm.

“Banks prefer enforcing on‘bright line defaults’ like actualpayment or financial covenantdefaults. The default needs to beclear and certain, otherwise thelenders could end up on thewrong end of litigation.”

Greg Campbell, a partner atGibson, Dunn & Crutcher says:“Notwithstanding some legiti-mate concerns surrounding thelack of transparency of pre-packadministrations, they are here tostay.”

Pre­packsAnousha Sakouiexplains why theprocess has becomemore accepted

‘The EMI case is oneof the best examples ofwhy pre­packs arenecessary in certainsituations’

Peter Spratt,PwC partner and

lead administrator ofMaltby Investments

Case study Reader’s Digest

When Reader’s DigestAssociation announcedplans for voluntarybankruptcy in 2009, it wasyet another US debt­ladenmedia company that hadfallen victim to theadvertising recession.

The publisher had beentaken private for $2.8bn atthe peak of the debt bubblein March 2007 by aconsortium led byRipplewood, a private equityfirm, which ended up losingits entire initial $600mequity investment.

“It was a very, verypoorly thought outtransaction, done at the topof the market, and theymassively overpaid,” saysPhillip Sykes, head ofcorporate advisory servicesat Moore Stephens andadministrator of Reader'sDigest UK.

“It was classic top of themarket froth and it crucifiedReader's Digest, which wasalready a decliningbusiness.”

Working with Kirkland &Ellis, the law firm, thepublisher struck anagreement with its seniorlenders to cut its debt loadfrom $2.2bn to $550m, butthe Chapter 11 process wasdelayed because of pensionissues at its UK subsidiary.

Fast­forward six monthsand the parent companyannounced it was placingits UK subsidiary intoadministration. This wasbecause the UK regulatorhad failed to grant itimmunity from claims for a£125m shortfall in its UKpension scheme that wouldonly be partly filled throughthe corporate restructuring.

As part of the plannedfinancial restructuring, theUS parent company hadagreed to make a paymentof £10.9m and transfer aone­third interest in theequity of the UK businessto the UK pension schemetrustees. The pension fundhad 1,600 members.

The scheme would thenhave transferred to thePension Protection Fund(PPF), the insurancescheme that ensuresinsolvent employers canmeet pension promises.However, the UK PensionRegulator did not approvethe company’s application.

The UK subsidiary wasbought from administrationby Better Capital, theturnround private equitygroup run by Jon Moulton,for £13m last year. Thegroup was attracted by thepublisher’s loyal customerbase and strong brand.

Mr Moulton negotiatedtwo deals, one to acquirethe company’s UK assetsand another securing alicence agreement with theUS parent to keep usingthe Reader’s Digest brand.

Mr Sykes says: “Oneaspect that made it[administration] complicatedwas that, both in the UKand the US, it hadoutsourced a tremendousamount of its operationsranging from mundanethings such as logistics,printing, packaging toinvoicing and debtcollection. The core ofReader's Digest was theeditorial and creative side.

“When I was appointedadministrator, we had toget in touch with outsourcepartners to re­establish arelationship in the context

of the administration tokeep the business going.That was difficult, becausethere were both UK andglobal relationships.”

The deal with BetterCapital left the company’spension scheme with thePPF and freed it from anexpensive lease on officesin Canary Wharf. Thecompany emerged fromadministration with 100staff and no debt orpension liability.

Sean Cooper, chairman ofReader's Digest UK anddirector of operations atBetter Capital, says: “Wepicked them up out ofCanary Wharf where theyhad been since the 1980swhen Reader's Digestemployed 2,400 people. Buttoday they are only 100, sothey were stuck with alease where they had toomuch space.”

Better Capital brought inits own management team,including a new digitaleditor. It has invested £3min IT systems and broughtthe publisher’s call­centreback onshore.

“We went back to thesupply chain to look at howthe money was beingspent,” says Mr Cooper.“There was a lot we coulddo to find new suppliers forthe business andreprocure.”

Reader’s Digest UK hadsales of £75m in 2009,helped by selling DVDs,books and insurance to itsreaders and running a prizedraw. Better Capital hopes

it will generate revenuesclose to that in 2011.

Mark Aldridge, chiefexecutive of Better Capital,says: “When you take abusiness out ofadministration, there is nomagic answer. You can dospecific things such asresizing and putting in placenew contracts, but youhave to invest. That is howyou get the return.”

“First, you have tocapitalise the businessproperly, then you achievestability and get things onan even keel so you canstart to invest. Then, youextend the brand to a widergroup.”

Reader’s Digest UK hasseen its circulation dropfrom 2m in the 1990s to432,000. Better Capital ishoping that, followinginvestment in thebusinesses, it will haverisen to 600,000 within24 months.

Reader’s DigestAssociation, the US parentcompany, completed itsfinancial restructuring andemerged from pre­arrangedChapter 11 in February2010. It came out wellcapitalised and had cut itsdebt by 75 per cent. Thegroup had $525m in exitfinancing and a new board.

Reader’s Digest is nolonger just known for itsflagship magazine. Thegroup has almost 80branded websites and sells40m books, music andvideos around the worldeach year.

Salamander Davoudi

Reader’sDigest is nolonger justknown forits flagshipmagazine

The ups and downs of havingUncle Sam come to the rescue

General Motors’remarkable recovery froma near-death experienceunderlines a tenet ofcorporate restructurings.

As one participant in theDetroit carmaker’s revivalputs it: “He who has thegold makes the rules.”

The rules at GM weremade by the USgovernment, which forkedout $50bn to put thecompany back on its feetin return for a 61 per centstake. Canada chipped inanother $10bn, butgenerally followedWashington’s lead.

Whether a private-sectorsaviour could have donethe job as quickly andsmoothly will long be amatter of debate.

Those who think so notethat court approval wasrequired every step of theway.

Judge Robert Gerber, theNew York judge whooversaw the GM case,would arguably haveapplied the law in exactlythe same way to any otherentity.

Even so, the governmenthad some clear advantages.

Other parties in therestructuring – such asbondholders, the UnitedAuto Workers union anddealers – might havefought much harder in thecourts had their adversarybeen anyone other thanUncle Sam.

Scores of dealers whosefranchises were summarilyterminated subsequentlyturned to Congress forhelp.

Looming over GM’srestructuring was a fearthat, so long as the101-year-old company’sfuture remained in doubt,buyers would shy awayfrom its cars, putting itssurvival and that ofthousands of suppliers injeopardy.

By late 2008, GM wasburning through $3bn ofcash a month. It warnedthat it could run out ofliquidity in early 2009.Speed was thus of theessence.

The Obama administra-tion’s auto taskforce, ledby Steven Rattner, aformer private-equity inves-tor, expedited the processby resorting to Section 363of the US bankruptcy code.

Under this provision,viable assets are parcelledinto a new company, whileunwanted ones remainunder protection fromcreditors.

Unlike a normalcorporate reorganisationwhich must be approvedby a substantial number ofcreditors, the Section 363

process requires only thecourt’s assent.

The same provisionwas used to rescueLehman Brothers’ money-management and Asianoperations.

GM filed for bankruptcyprotection on June 1 2009.The Section 363 “sale” wasfinalised just 40 days later.Unwanted assets, mainlycomprising about 200plants, buildings and otherproperties, remained inChapter 11.

The auto taskforce alsokept GM under constantpressure to lower its break-even point.

“We were determinedfrom the start to be hard-headed in our assess-ments,” Mr Rattner wrotein his book* recounting therescue of GM and itssmaller rival, Chrysler.GM’s management wassent back three times torevise its viability plans,each more ambitious thanthe last.

The carmaker eventuallytrimmed enough capacityand costs to ensure that itcould make money at USindustry sales not farabove the lowest levels

reached during the reces-sion. The taskforce wasalso ruthless in overhaul-ing GM’s management andboard.

Rick Wagoner, the chiefexecutive under whosewatch the company rackedup losses of $80bn, wasousted in the run-up to thebankruptcy filing.

As Mr Rattner saw it:“Wagoner proved moreadept at manipulating theboard than at running thecompany.”

Eight months later, FritzHenderson, Mr Wagoner’ssuccessor, once regarded asGM’s Mr Fixit, was alsogone.

The new GM began lifeunder the leadership of EdWhitacre, a formertelecoms executive, whoseeasy-going Texas drawlmasked an irondetermination toshake up the company’soperations and its culture.

All but one of 12members of the executivecommittee were replaced.

The committee emergedfrom its first, two-hourmeeting under MrWhitacre’s leadership witha plan to overhaul GM’score North Americanoperations as well as acrisp new vision statement“to design, build and sellthe world’s best vehicles”.

The old board was alsothrown out. According toMr Rattner, “a keycomponent of managementfailures like GM’s is almostalways the board of

directors, historicallythe weakest link inAmerican corporategovernance”.

Shorn of four of its eightbrands, hundreds ofdealers and most of itsdebt, the new GM made a$4.7bn profit in 2010.

It came within a fewthousand vehicles last yearof recapturing from Toyotaits crown as the world’sbiggest carmaker.

Not all of GM’s problemsare solved. Many NorthAmerican car buyersremain unconvinced thatthe leopard has changed itsspots. The troubledEuropean operationsremain a millstone.

The job of bringing amore entrepreneurialculture to a company oncefamous for interminablemeetings and omnipresentcommittees is a work inprogress.

Even so, GM’s newpaymasters, directors andmanagers have accom-plished much more thananyone thought possibletwo years ago.

Investors gave theirthumbs-up last Novemberby flocking to a publicshare offering that cut theUS government’s stakefrom 61 to 33 per cent.

*Overhaul – An Insider’sAccount of the ObamaAdministration’s EmergencyRescue of the AutoIndustry, by StevenRattner, published byHoughton Mifflin Harcourt.

Case studyGeneral MotorsBernard Simonreports on thecarmaker’s returnfrom the dead

Better assembled: GM’s new paymasters, directors and managers have accomplished much more than anyone thought possible two years ago Bloomberg

Whether a private­sector saviourcould have donethe job as quicklywill long be debated