Bankruptcies on the way

Bankruptcies on the way. Call the law firm to see how bankruptcy can solve debt problems. Business and individuals have been severely impacted by Covid.

The Covid-19 aka Coronavirus and its impact regarding bankruptcy

The coronavirus’s impact on capital markets, supply-chain disruption, hospitality and transportation is already seismic and being compared with the “economic shockwave” akin to the 9/11 economic ramifications. With events being cancelled nationwide and corporations and consumers cancelling nonessential travel, the impact on hotels, air travel, ground transportation and restaurants and other service providers that serve business travelers is becoming severe.

Room rates and occupancy are down. Across the board, and the cruise industry is taking on water at a rapid and dangerous rate, particularly after the State Department issued a travel advisory warning U.S. citizens not to travel on cruise ships. Combined with the unsettling press evoking images of floating quarantine ships and empty streets in Europe, it is hard to imagine a more dismal outlook in that arena.

Disruption in manufacturing, imports, exports and capital markets had already occurred due to the virus necessitating the closure of manufacturing plants and the trade wars having previously interrupted the flow of goods and services. Larger companies and their downstream suppliers and manufacturers are all experiencing material drops in cash flow. Credit has already started to tighten, and credit will continue to tighten for all the reasons discussed herein.

Add to the all-too-close thunder the lightning of the oil production supply and price war going on between Russia, Saudi Arabia and the rest of the world. This has now resulted in oil prices dropping 30% overnight.

The virus might not peak until summer, blanketing sentiment for the rest of the year. Except for cash, there really is no place to hide.

So what can we expect in the future?

Expect a new wave of restructurings in the energy, hospitality, transportation, manufacturing and retail industry spaces. It seems like the only upside will be the pharmaceutical companies and health care industries as they kick into overdrive to deal with the pandemic.

The bankruptcy filings and issues will hit all sides of any business relationship: companies, their customers, banks/secured lenders, vendors, landlords, insurance companies and employees.

Credit will tighten, thereby further impacting already-tenuous cash flows and the ability to access financing. There will be recessions in several countries, and these countries will need credit help. Downstream vendors, manufacturers and suppliers will be especially strained by reduced cash flow and the credit vacuum, making reductions in the workforce inevitable. Accordingly, transferred pressure on the consumer will lower consumption and spending. Banks will tighten.

Credit, and private equity, in an effort to unload; will have many discounted asset sales and bankruptcies. Pension plans that are already underfunded and under pressure will find their assets increasingly inadequate to fund their obligations.

The Federal Reserve will not have much room to help until the virus situation subsides, because it might be tantamount to pouring stimulus down the drain. The only effective thing the Fed can do is load up on assets in an effort to help, but rate cuts, while politically expedient, will not be an effective long-term solution. They will tighten and restrict the flow of upstreaming debt, thereby affecting originations.

Distressed companies can be expected to invoke force majeure clauses to argue that they are not really in “default” as they defend collection actions and ultimately access bankruptcy proceedings. While this is lawyer tactic, this will do little to address the larger economic issue of declining cash flows and asset valuations which will persist and put pressure on continued operations and reorganizations (in or out of bankruptcy).

Bankruptcy courts will need to become more lenient with debtors due to this unforeseen worldwide phenomena (this occurred during the 9/11 response), which will translate into more delays in the bankruptcy process for creditors, landlords and others. Courts are likely to give debtors the benefit of the doubt, given the economic forces out of their control, for a little longer than in traditional cases. This will only last so long and will do little to address the overall economic issues. This will increase the professional and related fee burdens on bankruptcy estates.

On a purely administrative front, court administration will likely change as well. Bankruptcy courts will allow for more telephonic appearances (as are being done now) in matters in order to attempt to minimize community coronavirus transmission. This will have the double-edged potential impact of further distressing the airline/hotel/restaurant sectors while at the same time cutting some costs for clients in the bankruptcy process.

There will be more opportunistic acquirers of assets/companies circling (sometimes called “vulture investors”). Bankruptcy creates a unique vehicle to acquire assets free and clear of liens and adverse interests as well. Unlike the 2008 meltdown of capital markets, however, it is likely that some cash-heavy funds, preying on the discounted asset values, will put their cash into distressed assets. The foregoing notwithstanding, many of those funds will spend considerable resources and time on rearranging their current assets and may be slow to invest until their own houses are in order, resulting in a limbo, “zombie”-like period. These delays may prove helpful to distressed companies as they wait patiently for the cavalry to arrive with their money and solutions.

Given further restrictions on cash flows and liquidity, there will be a depressing of values. This will impact LTV and trigger other covenant defaults, certainly for the short term. This also will have an additional overlay issue for lenders that need to “mark to market” on collateral valuations, which may have ripple effects (such as regulatory issues). In addition, this will impact sales of assets in bankruptcy cases as well as cram-down dynamics.

Watch for law firms, financial advisors, accounting firms and other restructuring professionals to establish multi-disciplinary “task forces” in order to have coordinated and rapid responses to clients and potential clients in a proactive move to deal with the myriad legal and economic issues attendant to the pandemic. In adversity there is opportunity.

Even if a vaccine appears soon, a financial storm is already upon us, and the resulting consequences will not be magically cured.

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