COVID-19: Bankruptcy Or out of Court Restructuring/Bankruptcy Alternatives

COVID-19: Bankruptcy or Out of Court Restructuring/Bankruptcy Alternatives

April 20, 2020 Presenters

Rebekah Smith Tiffany Strelow Cobb Director of Forensic Partner & Chair of and Dispute Advisory Bankruptcy & Creditors' Services Rights Practice Group GBQ Vorys (614) 947-5300 (614) 464-8322 [email protected] [email protected]

2 Agenda

• Path Forward

• Alternatives to Bankruptcy/Out of Court Solutions

• Bankruptcy Alternatives

• Q&A

3 What is the path forward?

• Unknown how long the stay at home orders will last

• What does recovery look like? U, W, V or some other pathway

• Cash burn and cash reserves

• Uncertainty

4 COVID-19

• Unprecedented economic impact

• Beyond business’ control • Colors perspective on solutions • Short-term v. long-term

5 Key Goal of Restructuring Professionals

• To advise/help clients avoid a bankruptcy

• How? • Restructure debt outside of bankruptcy • Complexities: • Multiple actors • Some more critical than others • Most beyond the control of the business • Examples: primary suppliers/vendors, lenders, employees and unions • Transactions / litigation issues

6 Out of Court Restructuring or “Workout” What is it?

• What does this mean?

• Not court-supervised

• Key creditor agreement • May be with secured lender • May need to include critical vendors

• Restore liquidity

7 Out of Court Restructuring or “Workout” Just what the doctor ordered (?) …

• What is the problem?

• What caused it?

• What do you need?

• Will a default cause a result that is unfixable / uncontrollable?

• Cash flow / liquidity status?

• Who are the creditors • Secured? • Unsecured?

• Litigation?

8 Out of Court Restructuring or “Workout” Planning

• Work with financial advisor to plan crisis management

• Identify parties in interest • Creditors • Secured • Unsecured • Customers • Suppliers/Vendor • Equity • Guarantors • Counterparties to contracts

9 Out of Court Restructuring or “Workout” CARES Act: Access to Capital

CARES Act

• SBA • PPP forgivable loan • EIDL • SBA Bridge

• Payroll tax deferral

• Employee Retention Credit

• Main Street Lending Program

10 Out of Court Restructuring or “Workout” CARES Act – Business/Creditor “win-win”

Payroll Protection Program (PPP)

• Forgivable loans (eight weeks) • 25% or less can be directed to rent or mortgage interest among other things • Interplay with state forbearance “suggestion” (varies state to state)

Other Loan Programs

• Attractive terms • Access to credit

11 Out of Court Restructuring or “Workout” Communication

Know your audience

• Lenders

• Vendors

• Customers

• Landlords

• Employees

• Local government agencies

12 Out of Court Restructuring or “Workout” Communication

COVID-19 Overlay

• Outside of your control

• Honest

• Forthcoming

• Create level of trust

• Highlight time horizon: • Critical to have cash flow and business projections at your fingertips

13 Out of Court Restructuring or “Workout” Lender-focused

• Loan default? Before or After? • Strained lending relationship with defaults prior to COVID-19? • Defaults as direct result of COVID-19?

• Acceleration?

• Collateral to pledge?

• Personal guarantee?

• Forbearance versus liquidation – your story

14 Bankruptcy Options - Business “Chapters”

• Chapter 7: cease business and liquidation by trustee

• Chapter 11: reorganization (or liquidation as going concern)

• “Subchapter 5” under Chapter 11: new! / more cost-effective

• Side note! • Chapter 13 • Think “wage earners” chapter • Not for businesses

15 Bankruptcy - Why?

• Underperforming lease(s)?

• Uncooperative creditors or lenders?

• Litigation?

• Sale free and clear?

• Cram down?

• Other bankruptcy-unique benefit?

16 Bankruptcy Subchapter 5 – Small Business Chapter 11

• New (but pre-COVID) – February 2020

• Eligibility expanded under CARES Act • Old: aggregate debts of no more than $2,725,625 (of secured and unsecured debt) • New: under the CARES Act, the debt limit is increased to $7.5MM • This increase applies for one year after CARES Act becomes effective and will reduce back to $2.765M in a year (3/27/2021). In turn, as you can tell, this makes Subchapter 5 a viable, cost-effective option to a broader range of businesses

17 Bankruptcy Subchapter 5 – Why do we care?

• Streamlined Chapter 11

• Material differences from “traditional” Chapter 11: • Subchapter 5 trustee (akin to Chapter 13 trustee) • No UST Fees • No Unsecured Creditors Committee • No Disclosure Statement • Within 60 days of filing, court status conference focused on plan • No competing creditor plans • Plan filed within 90 days • No absolute priority rule (with payment plan requirement) • Plan confirmable without impaired class support • Plan can modify a secured creditor’s rights in the debtor’s principal residence

18 Bankruptcy - Additional Issues

• Multiple additional considerations

• Cash collateral (live on receipts) & DIP financing

• Insurance

• Some are strategic, others gatekeeping

• Pre-planning issues (timing / when pull the trigger): • 20 day deliveries – admin claims / stop transit • PACA • WARN Act • Use of leased space • Insiders • Open contracts

19 Projecting Future Performance

• Important items to consider: • May need to perform scenario analyses in order to try to better forecast how the business will do within the next 18-24 months • We don’t know what the recovery will look like – U shaped, V shaped and W shaped are all possibilities

20 Recovery

• What does recovery look like?

• How long of a time period until things are “normal” or recovered? • We do have some indication of what these companies might look like in a recession (2008/2009) • How can you use that data to predict how the company may perform now? • No history of pandemics

• Restaurants, bars and breweries – particularly hard hit – difficult to project recovery pattern

21 Questions

22 Contact Information