How to cut down the cost of keeping a company alive: John Melbourn of NatWest joins in the debate on sky-high restructuring charges by outlining the bank's proposals for controlling expenses

AS the lead bank in many big corporate restructurings, National Westminster shares widespread concern about the fees that have been charged. Although companies pay for the restructuring, they have little control over a large proportion of the work and lack a champion to contain costs.

We at NatWest have identified reasons for cost escalation in restructurings and are setting about improvements, especially in the area of purchasing professional services. We have also developed proposals for reducing costs.

As part of this, NatWest consulted professional firms including Allen & Overy, Wilde Sapte, Ernst & Young, Coopers & Lybrand and KPMG, about introducing modern approaches to purchasing - such as those in the CBI Partnership Sourcing initiative.

Under the London Approach to restructuring, a framework developed with the Bank of England, there are four main stages:

1: All banks agree to 'stand still'. They do not call in loan facilities, or seek to improve their own positions, until the options for the company have been reviewed. The lead bank (usually the principal lender) appoints independent legal and accounting firms to represent the banks.

2: The company's financial and legal position and viability are reviewed and there may also be independent property valuations.

3: Options are established. These could involve new finance, a debt-for- equity swap, asset disposals or re- phased interest payments.

4: The company's performance is monitored by accountants to ensure compliance with new covenants and its ability to service remaining debt.

There are two main areas of cost:

Fees and loan margin paid to the banks, unquestionably a large part of the 'headline' cost. It is important to weigh these against the hundreds of millions of pounds of loans still required by the restructured company, and the fact that when money was originally lent the company was a sound risk and the margin was lower. A radical change in the margin is appropriate in order to refinance what has become a troubled company with a far greater lending risk.

Service-related costs: fees for work on the restructuring paid to the company's lawyers, accountants, merchant bankers, the syndicate's lawyers and accountants and to the lead bank.

The lead bank will need to provide a dedicated team of up to six people for up to 12 months. In four cases we analysed, NatWest's fees for this averaged 0.2 per cent of total debt.

Other costs that can be influenced by the lead bank are professional fees to lawyers, accountants and valuers for advice to the banks. These were 34 per cent of service-related costs in the four cases.

Professional fees under NatWest's influence for three cases it led in 1992 were 0.3 to 0.4 per cent of total debt.

These fees were 8 to 53 per cent of average annual dividends for the two years before the restructuring. If the company had gone into receivership instead, shareholders would have experienced very reduced circumstances and jobs would have been lost.

The cost of a restructuring depends on its complexity. Many companies have subsidiaries in as many as 20 countries. Funding is frequently through 30 or more banks, and secured against different parts of the company with various levels of exposure. Banks are often from many countries and business cultures.

The overriding consideration is to safeguard the relative strengths of individual claims without fear or favour.

Every creditor has a right to form his own judgement and not have it imposed by others with different motives. On the other hand, it seems unreasonable for one creditor to hold a gun to the collective head of the others. So there is a debate on whether majority voting should apply.

It is difficult to see how a majority view can be achieved other than by reference to a court, which would fly in the face of the voluntary nature of bank-led restructurings.

Where costs escalate, the cause is usually specific rather than a general slackness. Some of our case studies demonstrate extreme difficulty in getting all syndicate banks to agree to the proposed deal (in one case, legal documentation had to be redrafted 17 times before all would sign.)

Legal or accounting problems are sometimes encountered with the company being restructured; one company had such poor management information the investigating accountants needed a team of up to 30 staff.

It is sometimes of critical importance to obtain impartial advice on key questions such as market forecasts and production capabilities.

Our analysis shows that there are few actions that on their own will dramatically affect costs. Instead a framework has been developed to ensure cost-effective management by the lead bank. We hope progressively to encourage professional advisers to work within that framework:

Professional firms will provide weekly cost reports, consisting of hours worked by grade and cost of staff. The lead bank, with the company where appropriate, will review cost-effectiveness and identify concerns at an early stage. Cost estimates will also be provided at key stages.

The lead bank will monitor delivery against estimates and review this with firms to identify reasons for any overruns and scope for improvements. The emphasis is on flexibility.

Assessment by the lead bank of professional firms against performance measures to cover: availability of relevant staff, quality of work, ability to manage change and cost-effectiveness. These reviews will take place every three months or at the end of a case. The focus will be on how working practices can be improved.

Annually, NatWest will compare the performance of the firm with other cases.

Other ideas include minimising the use of standstill agreements, standardising documentation within and between professional firms and a list of required information to give to companies at the start.

Perhaps the most important step a company can take when it senses difficulty ahead is to talk to its main bankers. Too often advice is taken elsewhere or work put in hand that duplicates cost.

Moveover, the information may not be in a form helpful to the banks and will usually require independent verification.

Key information to be kept up to date includes group structure charts, records of contingent liabilities and especially guarantees, records of inter-company debt and facilities and accurate calculations of group exposure. These are matters for an audit and compliance committee.

NatWest is not alone in addressing these problems but to achieve the maximum benefit change needs to take place across the industry. We are happy to share our ideas with other interested parties in order to broaden the discussion and engender balanced debate. There is a need to establish common standards and practices.

The author is chief executive, group risk at NatWest. This article is extracted from a study into professional fees conducted by the bank.

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