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CFOs should manage signs of early financial distress the way a smart patient would handle personal health red flags, PwC’s Steven Fleming told CFO Dive.

When it comes to health, it’s commonly known that ignoring problematic symptoms can result in worse outcomes, such as finding yourself dialing 911 and being taken into open heart surgery rather than proactively managing the cardiac issue.  

Likewise, Fleming, who leads PwC's U.S. performance and restructuring practice, said CFOs should take immediate proactive action when they notice early warning signs such as declining revenue, compressing margins or newly generated losses.

“The sooner I deal with that and acknowledge it and put into place a plan or try to get a prescription and take my medicine, the higher the likelihood is that you avoid a restructuring altogether and certainly a bankruptcy,” Fleming said in an interview Friday.

Bankruptcies hit a decade high last year, ticking up to 552 filings last year from 541 filing in 2024, and they have steadily climbed from 293 in 2021, according to a February PwC report. Companies from the real estate, consumer goods and energy and industrial sectors comprised about 80% of the bankruptcies. With higher input costs along with inflation and “uneven” consumer spending pressuring companies, the report forecasts that traditional bankruptcies may increase this year.  

Meanwhile, less costly out-of-court restructurings are generating a lot of buzz. Known as liability management exercises, the approach is an increasingly popular workaround aimed at avoiding bankruptcy court, Fleming said. “Anecdotally, it’s all anyone is talking about,” Fleming said. “LMEs, LMEs, LMEs.” 

Over the last 12 to 15 months, the industry has warmed to the LME trend, which Fleming says is a “fancier” way of describing the practice of getting a bunch of creditors together to amend a credit agreement.

“The idea is to do things quickly and outside of the bankruptcy court’s jurisdiction to minimize the transaction costs and fees associated with it and to do things faster because you don’t have to go through a court-driven process,” he said.

LMEs’ other benefit is that they avoid the headline risk of bankruptcies that can rattle investors, customers and vendors, along with minimizing the potential disruptions that can come with bankruptcy. “There’s lots of restructuring activity that may not be evident to the public because [LMEs are] all done behind closed doors,” Fleming said.

The LME process has been somewhat controversial. Some critics view it as a new way to “kick the can down the road,” rather than truly solve the underlying problems causing the distress, said Fleming, who declined to identify companies who have gone through LMEs. 

Among the companies that have trod both paths is Texas-based At Home Group. In 2023, the home furnishing retailer underwent an LME, ultimately raising money through a “double dip transaction” to address its liquidity crisis. But it still struggled amid the lackluster housing market, according to an Ion Analytics report. It ended up filing for bankruptcy last June, citing tariffs and consumer uncertainty, emerging from Chapter 11 in October, according to Industry Dive sister publication Retail Dive.

Fleming has a few tips for how CFOs should start thinking about LMEs before what he considers a “forcing mechanism” occurs, which reduces their ability to control their strategy. Those could be coming close to or tripping a covenant agreement with a lender or coming close to or running out of cash.  

For example, CFOs can recognize the warnings and consider taking action with or without a professional that could bring some objectivity to the process. The company could then challenge the business plan, put in place action items to take out cost, drive revenue or restructure the business operationally. 

The idea is to restructure the business from a position of strength, he said. “When you’re dialing 911 and getting third parties involved, you lose control,” Fleming said, equating an emergency call in the case of a financial distress situation to raising the stakes through formal serious restructuring talks with key parties like a landlord, lender or a critical supplier. “Control is everything for directors and officers of an enterprise.” 

A finance chief who acknowledges reality can play a key role in heading off a more serious crisis. If a lender, typically the most important stakeholders in a distressed scenario, doesn’t think the CFO has a good grasp on the business, they could force a chief restructuring officer on the company or require the company to hire a turn-around advisor. 

An under-the-radar conversation could look something like a company telling the lender that in six months or so, based on their modeling, they expect some upcoming issues and would like to propose a plan to alleviate testing for one or two quarters. In exchange, they’ll pay a fee and every six months, will give them an updated business plan.  

“It may be counter intuitive because a lot of people don’t want to show weakness and say, ‘I’ve got a problem,’ but in my experience it’s more often a strength,” Fleming said. “By doing so and controlling the narrative on your terms you increase the likelihood you can do a deal outside of court.” 

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