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These are daunting times for all American citizens, and corporations are facing tremendous challenges as well. The shutdown of a huge segment of the economy caused by the COVID-19 pandemic has left most companies grappling with massive hits to their revenues. Businesses across a wide swath of industries and in vastly different financial conditions must make very tough decisions about how to stretch cash on hand, substantially cut costs, fire or lay off employees, refinance debt to avoid loan defaults and potentially reorganize. The Corporate Restructuring and Commercial Bankruptcy specialists at Gawthrop Greenwood stand ready to help.
“Our team is well-suited to counsel, advise and guide the myriad of companies that will simply not be able to make good on their commitments in a timely manner and may need to seek to negotiate new terms with lenders, vendors, employees and other parties,” says David deBruin, a partner in Gawthrop Greenwood’s Restructuring and Corporate Bankruptcy department.
During his 24 years in practice ─ in addition to representing distressed corporations in out-of-court debt restructurings, also called “workouts,” and Chapter 11 debtors-in-possession ─ deBruin has represented banks, lenders, investors, lessors, leaseholders, creditors, purchasers, vendors, creditor committees, Chapter 7 trustees and preference defendants in bankruptcy courts located in Delaware, Pennsylvania and New Jersey.
His colleague Michael Merlie, a practitioner of corporate and business law for over 25 years, has also represented creditors in bankruptcy matters, including obtaining relief from the automatic stay and successfully defending preference actions.
“We’re seeing quite a few long-standing businesses ranging from multinational corporations to closely held family businesses, which were flush with cash before the crisis hit, and must now do cash-flow projections simply in an attempt to figure out how they can get by for the next few months,” says Merlie.
deBruin notes that mortgage lenders are looking for additional financing in anticipation of millions of homeowners being unable to make timely mortgage payments. One brick-and-mortar mall staple, The Cheesecake Factory, said that it wouldn’t be able to make rent payments on all of its leases because of the drastic loss of business. Many Fortune 500 companies have tapped billions of dollars in credit from banks in preparation for an uncertain future.
In addition, companies that depend heavily on in-person consumer spending are especially stressed by the economic fallout from the coronavirus pandemic. Traditional retailers ─ whose financial positions were already precarious due to the huge increase in e-commerce ─ will run into additional trouble, as a record number of people have filed for unemployment and even more people are forced to cut back on shopping and spending.
With these factors in mind, Gawthrop Greenwood is expecting to advise clients through a record number of corporate bankruptcies and out-of-court corporate debt restructurings/workouts. In a workout, businesses work directly with their current banks/lenders to resolve a distressed or defaulted loan.
“The psychological interplay between company/debtor and bank/creditor in a workout of a distressed or defaulted loan involves many issues that go beyond the plain language of the loan documents and the supporting case law,” says deBruin. “There are often significantly conflicting emotional pressures inherent in a restructuring situation, which need to be recognized and diffused. However, in the ‘chess game’ of a restructuring/workout, emotional and psychological issues may strongly influence both parties’ actions.”
Says Merlie, “Every credit situation is unique. The leverage and perspective each party brings to the table varies, and actions of creditors must be tailored to the particular situation, including the personality and background of the debtor.”
Generally, a bank will have well-documented loan agreements that provide for a myriad of remedies, although some are likely to be Draconian and deserve considerable thought before being threatened or exercised, which can threaten the economic survival of the borrower.
“Couple that with the anxiety of ‘losing it all’ and one may begin to understand the psyche of the borrower approaching the restructuring/workout process,” says deBruin. “Absent a negotiated out-of-court workout, the borrower may choose to file for bankruptcy protection.”
When the overall debt structure is complex and the lenders (and vendors) start vying over who gets paid first, a debtor may choose to seek protection in Federal Bankruptcy Court, where all the corporate debts can be renegotiated under the watch and approval of a Federal Bankruptcy Judge and the United States Trustee. A Chapter 11 bankruptcy filing allows a debtor to seek new financing, sell off troublesome but profitable subsidiaries or underutilized assets, and close unprofitable stores, plants, or locations. A reorganization under Chapter 11 allows a business to catch its breath and ideally provides it with a fresh start.