by Jayne Crosby, CCE, Gritton & Associates

The presenters for the September ICEL meeting were Jeffrey Cohen, Esq. & Nicole Fulfree, Esq. of Lowenstein Sandler. 

• Covid-19 has triggered a global economic crisis
• Total US corporate debt is ~$15.5 trillion and over 40% of companies listed on the US stock exchange in 2019 were unprofitable
• Companies face significant challenges without substantial liquidity
• Cash-crunched companies draw down credit lines, increasing borrower default
• Reduction in economic activity as supply chains disrupted and consumers withdraw

The CARES Act

• State limits on debt collection and related lawsuits
• PPP – Paycheck Protection Program
  • Intended as a lifeline for small businesses struggling during the pandemic
  • Eligible borrowers can receive up to 2.5x their average monthly payroll, capped at $10m
    • Without origination or prepayment fees
    • No collateral or personal guarantees
    • Interest and principal payments deferred for six months
  • Loan is eligible for forgiveness if used toward
    • Payroll costs
    • Mortgage interest
    • Rent obligations
    • Certain utility payments

Some Adverse Industry Trends for the following:

• Retail
• Hospitality (Hotels/Restaurants)
• Entertainment
• Transportation/Airlines
• Auto and other Manufacturing
• Health Care
• Energy
• Pharmaceuticals

Many retailers filing for Chapter 11 Bankruptcy. Many re-opened in July in time for going-out-of-business sales.

Non-Covid reasons for retail bankruptcies include: changes in customer preferences, excessive focus on apparel and accessories, too many stores, pressure from online retailers, uncertainty in the economy, private equity investors saddling them with excessive debt, and rising interest rates.

Forecast projects one in three US restaurants may close permanently this year, causing more unemployment – as many as 231,000 of the nation’s roughly 660,000 eateries will likely shut down

Identifying Customer Risk Factors and Warning Signs – Questions to ask to deduce whether to extend or not:

• What can we do to help during this unprecedented crisis?
• Have your lenders declined to advance funds?
• How much availability remaining on your bank line?
• Are you presently in default to any lenders?
• Have you furloughed, laid off, or terminated employees?
• What capacity level are you operating? Do you expect further reduction?
• How much longer can you continue to be shut down or to operate at reduced capacity?
• Have you seen new orders slow down/stop?
• Do you know if any of your top customers are shut down or operating at reduced capacity?
• Have any of your vendors indicated delays in providing goods/services?
• Have you had any shortages inside/outside the US?
• Are you current with all of your vendors?
• Do you project have sufficient liquidity to make your next debt service payment?
• Do you have any debt maturities coming due? Are you taking steps to refinance/amend/extend?
• Have any lenders made demands upon the company?
• Have you retained any restructuring professionals/crisis managers?

Identifying Customer Risk Factors and Warning Signs

• Customer-Specific Issues
  • Operational issues: large losses/liquidity issues
  • Supply chain interruption
  • Reduced capex
  • Covenant breach: default interest and fees
  • Forbearance agreement
  • Credit downgrade
  • Terms pushback
  • Reduction/loss of credit insurance coverage
• Third Party Assessment of Credit Quality
  • Credit default swap pricing
  • Financially sophisticated counterparties with access to broad info
  • Higher pricing
  • Trading prices
  • Secured debt trading under par
  • Unsecured debt trading under par
• Financial Reporting and Management Issues
  • Delayed SEC filings
  • Qualified audit opinion
  • Going concern qualification
  • Change in auditor
  • Unexpected resignation of board members
  • Unexpected change of CEO or CFO
• Restructuring Preparation
  • Retention of restructuring counsel or focused advisors
  • Chief restructuring officers, investment bankers, real estate brokers, inventory liquidators
  • Evaluating strategic alternatives
  • Appointment of new board members w/insolvency/restructuring backgrounds
  • Selling of significant blocks of stock

Use available resources to identify potential issues:

• Other vendors
• Credit ratings
• Publications/websites
• Industry reports
• Analyst reports
• Google/social media
• SEC filings

State of the Economy:

• GDP figures released in July presage more economic pain to come
  • Historic drop in GDP 32.9% in Q2
• 1M increase in continuing weekly jobless claims
• Major drop in consumer confidence
• Unpredictable labor force participation
• Stalemate in Congress

Economic Pressure Points:

• High unemployment
• Onslaught of stale and new operational expenses
• Strain on small businesses
• Changes in consumer behavior
• Concerns for landlords
• Concerns for lenders and private equity

Bankruptcy Filings:

• Uptick in Chapter 11 filings year over year
• Increase in small business filings
• Drop in consumer filings
• Increase in Chapter 15 filings

Trends in Bankruptcy Filings:

• Small Business Reorganization Act (SBRA) makes it easier to restructure
  • Granted Chapter 11 protections subject to a faster timeline
  • Elimination of quarterly US trustee fees
  • Elimination of creditors’ committees
  • Appointment of Standing Ch. 11 Trustee with oversight authority to assist in facilitation
  • Unique plan provisions
  • CARES Act increase maximum aggregate debt limit for small businesses to $7.5m
    • Intent to enable small business to use Ch. 11 to survive the pandemic and repay debts without hardship