Bloomberg -Traxi Seminar Excerpts



Role and Appointment of Chief Restructuring Officer

The title of Chief Restructuring Officer (“CRO”) is given to a financial professional hired to design and implement the turnaround of a company experiencing financial distress.

The role of the CRO is centered on restructuring the balance sheet of a company that has taken on more debt than it can repay as a result of insufficient cash flows generated by the business. The position is one that has increased in popularity amongst companies that have filed for bankruptcy since the United States Bankruptcy Code was changed in 1978. Prior to 1978, a trustee was typically appointed in most bankruptcy cases.

Appointing a CRO can lend creditability to a company in financial distress. It signals to creditors that the company is willing to take meaningful, decisive action to address its deteriorating financial position. CROs benefit from not having prior history with the company, therefore not being responsible for the “sins of the past.” This clean slate enables the CRO to make unbiased business decisions more effectively than the pre-existing management team as the CRO has no ties to prior strategy recommendations.

The roles and responsibilities of a CRO can vary from case to case, depending on the degree of financial distress and the ultimate restructuring strategy. CROs often take on part of.  This section was prepared by Perry M. Mandarino, CPA, a member of Traxi LLC, and Sergio Costa, CIRA, and Scott Nichols, each of whom are with Traxi LLC as a Director and Associate, respectively.

The responsibilities typically assumed by CEOs, CFOs and COOs. Some services typically provided by a CRO on behalf of debtors include:

  • Facilitation of communication and dispute resolution between the debtor and its creditors;
  • Supervision of the debtor’s general accounting functions;
  • Monitoring cash expenditures, receivables collection, and projecting cash flow;
  • Reviewing financial information prepared by the debtor;
  • Assisting in the formulation of a plan of reorganization;
  • Formulating recommendations to the debtors with respect to proposed asset sales;
  • Assisting the debtor in negotiating with Unsecured Creditors Committee (“UCC”), secured lenders and other creditor and regulatory constituencies;
  • Reviewing and assisting with the preparation of business plans;
  • Providing expert testimony;
  • Assisting with the analyses and reconciliation of claims against the debtor and bankruptcy avoidance actions;
  • Performing a liquidation analysis of the debtor;
  • Assisting the debtor with bankruptcy administration matters;
  • Assisting the debtor in complying with the reporting requirements of the Office of the United States Trustee, Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and Local Rules of Bankruptcy Procedure;
  • Providing the debtor with other and further crisis management services regarding the debtor’s operations, including valuation, securing post-petition financing, general restructuring and advice with respect to financial, business and economic issues, as
    may arise.

An example of CRO retention documents can be found in Exhibit A: Certification of Perry M. Mandarino in Support of Debtors Motion for an Order Authorizing the Debtors to EnterInto an Agreement with Traxi LLC to Provide Crisis Management Services to the Debtors in re: Kara Homes, Inc., et al.


Senior lenders generally start to show fatigue by the time a company reaches bankruptcy. Some lenders for a variety of reasons no longer want to deal with the debt and are ready to sell the loan. Carrying costs such as real estate taxes and insurance are one of the reasons banks do not want to hold land. Other reasons might include, banks selling loans to manage various portfolio quality statistics. Banks often sell loans because they prefer to keep the nonperforming asset ratio below a certain target level.

Hedge funds and private investors are very sophisticated and very creative when making investments. Hedge funds are private investment vehicles that charge management and performance fees. Buying the debt pre-bankruptcy based on speculation of a certain event, buying the debt post filing, providing a DIP facility are just some of the strategies that can be used. Hedge funds have raised tremendous amounts of capital in recent years and need to put that capital to use. Hedge funds employ a diverse set of investment strategies.

Hedge funds and other alternative types of investors are not restricted the same way large financial firms are restricted. Their appetite for risk is greater due to their ability to land bank if they own the debt. The strategy employed in the Kara Homes case focused on buying all of the senior debt at discounts and then providing an equity infusion. This strategy allows for multiple revenue streams. Another strategy that could be used in a liquidation scenario is for management to partner up with an investor and bid for the properties at auction. Distressed investors can gain leverage in cases by buying claims other than simply secured lender claims. Mechanics liens and the priority status of the liens can have an impact on the case.

Therefore, owning mechanics liens can carry a great deal of leverage in the case. On January 10, 2008, Lennar reported that Morgan Stanley purchased an 80% stake in 32 communities over various states. The purchase price was 60% less than the price two months prior. Orleans Homebuilders Inc. of Pennsylvania sold 1,400 lots in December 2007 for $32 million. According to the builder, the properties had an $86 million book value. Land Banking is another strategy that is becoming very popular. It is a process by where an investor buys land and then holds the land until a substantial increase in value can be realized through a sale. Land banking is also popular as an investment due to the benefit of the land being a tangible asset as opposed to equity shares or bonds.

The recent situation, covered by the New York Times2, of Harry Macklowe in the Manhattan commercial real estate market is a great example of the roles of alternative investors.

He is a New York developer that purchased $7 billion of Midtown Manhattan properties from Blackstone, who performed the buyout of Equity Office Properties. Mr. Macklowe purchased the properties in February 2007. The purchase was financed with $50 million of Mr. Macklowe’s own capital, and the remaining with mostly short term financing. Almost $6.4 billion of the debt will mature in February 2008. As of early January 2008, Mr. Macklowe had not been able to replace the debt with longer term capital or pay down the debt with divestitures. Vornado Realty Trust bought a stake in loans collateralized by four buildings Mr. Macklowe owns in Fall 2007. Fortress Investment Group, a hedge fund, leant $1.2 billion in the form of a short-term bridge loan backed by a limited partnership interest in the G.M. Building, interests in eleven Macklowe properties, and a $1 billion personal guarantee from Mr. Macklowe. It will be interesting to learn the outcome of this case.