The Covid-19 Economic Fallout: Think Outside the Box for Tools and Remedies

April 22, 2020

By Clinton E. Cutler

Think outside the box business concept. box, hand and bulbs isolated on pastel pink background. creative idea. Conceptual minimal design. 3d renderingRestructuring professionals are used to dealing with a crisis. But the current crisis is unlike any most of us have seen or dealt with before, including the Great Recession of 12 years ago. The news headlines tell the tale: whole industries virtually shut down for what may be weeks or months, government directives to shelter in place, the potential for overwhelmed health systems, mass unemployment and virtually every sector of the economy under various degrees of stress. In times like these, professionals in our industry should consider the traditional tools for helping troubled businesses but also need to think outside the box for non-traditional methods of solving client problems.

Traditional Tools

Traditional tools are well known to restructuring professionals, and include:

Initial Assessments of the Problems

What are the immediate problems facing the business? What is the relationship with the primary lender? Have critical suppliers cut off credit and access to future needed raw materials or critical supplies? Is the landlord threatening eviction for non-payment of rent?

Cash Flow and Liquidity Assessments

What are the current and immediate weekly revenue streams of the business? What is the current cost structure and what can be done to immediately reduce costs or right size costs to the revenue stream? Is the company in compliance with lending requirements for working capital advances and what are the current and expected borrowing base to support continuing advances?

Management and Information Systems

How strong and credible is management? What are the accounting and information systems of the business and how reliable is the information?

Communication and Credibility

What is the status of relationships with critical vendors, lenders and other creditors? Are there credibility issues for current management that must be overcome? Usually, immediate communication followed by a communication plan can be extremely useful to buying time to complete assessments of the problem and consideration of solutions.

Balance Sheet and Liquidation Analysis

What assets are on the balance sheet and what are their values in a hypothetical piece meal liquidation of the business? Are there excess assets like equipment that can be eventually sold to raise cash or unencumbered assets to support new borrowing? The liquidation analysis is used to demonstrate the hypothetical worst-case outcome for the business and its constituents and may become an important tool in future negotiations to restructure debt.

Legal Remedies

What legal remedies are available to the business and its creditors? What remedies can be implemented quickly by creditors which may accelerate the timing of a restructure? Understanding how these remedies work could be a key to success in out-of-court negotiations and restructuring.

Develop Plans

Normally, plans must be made to deal with the most immediate problems and to buy time to develop a longer-term solution to the overall problem. These plans go hand in hand with the communication strategy mentioned above.

Non-Traditional Tools

In addition to these and other traditional tools, restructuring advisors need to think outside the box and keep abreast of fast changing developments which may offer non-traditional methods and approaches. These include:

Federal Government Legislation

By now, everyone in the business community has heard of the CARES Act, which is the Federal stimulus legislation enacted on March 27, 2020. This law provides several different sources of rescue funding for businesses and individuals, including provisions for forgivable loans to qualifying small businesses. Money under this legislation may provide a lifeline to a significantly stressed business, but it may take weeks or months before that money is available. Learn more about the CARES Act by visiting Fredrikson & Byron’s COVID-19 Resource Center.

State and Local Government Executive Action

There are numerous actions taken or that will be taken by state and local governments impacting businesses in non-traditional ways. For example, many state governments have suspended or greatly curtailed eviction proceedings, thereby suspending or limiting the immediate availability of an important landlord remedy. Judicial systems are likewise delaying or suspending most hearings except for certain emergencies in order to comply with social distancing guidelines. There are caveats but being aware of these limitations on creditor remedies may strengthen the client’s hand in negotiations with creditors or may factor into decisions on when or if to pay certain creditors.

Tax Deferrals and Holidays

Many states and the federal government have pushed back deadlines for filing returns and making payments for income, property, sales or use taxes. These delays can provide some immediate relief but should be used with caution. Tax payments will eventually come due, and certain types of tax liabilities can be imposed on owners or managers of the business.

Lender Assistance

Lenders like commercial banks are receiving guidance from state and federal bank regulators on loan extensions and payment holidays that give the lenders greater ability to restructure a loan without having to treat the loan as troubled. Why does that matter? Lenders with otherwise troubled loans may have to make reserves out of their capital to cover what otherwise may be a bad loan that has to be written off. Thus, they may have their hands tied in being able to restructure a loan. Being forearmed with knowledge of regulator guidance is of use in shaping requests to your client’s lenders for payment restructurings, deferrals and other loan modifications. In addition, there are specialty lending programs that provide payment holidays, like those for mortgages on federally backed multi-family buildings.

Supplier and Other Contracts

Many commercial contracts have force majeure provisions that excuse performance, including payment or purchase obligations, in case of a natural disaster or widespread economic crisis. (Such provisions are usually not in the borrower side provisions of lending documents.) A quick review of those contracts may be useful to determine if there is legal basis to suspend or delay performance owed a creditor.

Insurance

What types of insurance and coverages does your client carry? Some businesses carry business interruption insurance. While such insurance is unlikely to provide an immediate source of cash, the ability to make such a claim shouldn’t be overlooked. Moreover, the policies should be carefully reviewed because not all business interruptions may be a covered event.

The business scene is changing rapidly. We can expect that additional non-traditional tools and remedies will be tested and deployed if the crisis continues for the weeks and months. It is incumbent on turnaround professionals to stay abreast of these developments and be prepared to assist clients with more than traditional thinking and advice to solve their problems.

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