Strategies for Portfolio Companies During Financially Unpredictable Times

Ice Miller is carefully monitoring the rapidly changing developments of the coronavirus (COVID-19) pandemic. It is our goal to provide you with the most up-to-date information available, along with advice on best practices and strategies to minimize loss and maximize long-term financial stability.
 
Below are some strategies for assessing exposure and preparing and responding to bad debt, slow-paying or delinquent counter-parties, bankruptcies or related creditors' rights litigation. Note: The steps and strategies below should be pursued simultaneously despite the numbered steps.
 
Step 1: Assess your Current Business Financials

• Review your business’ balance sheet and cash flow with financial and legal advisors to detect possible insolvency, cross-default risks and the need for financial restructuring.
• Modify operating cash flow projections, including assumptions, forecasts and business plans that better reflect the current and forecasted economic environment. It is important that these projections consider at least short- and medium-term worst-case scenarios. If a worst-case scenario suggests the need for your business to restructure, be sure to commence this process expediently. More options will be available to your business if you begin the process quickly.
• Create an inventory of your business’ existing working capital and develop a plan to achieve rapid positive cash flow benefits.
• Consider tax implications of any restructuring plans with your tax advisors. 

Step 2:  Review your Contracts for Risk Exposure

• Review contracts—both existing and new—for Insolvency Event, Event of Default and any Termination Event clauses and Financial Covenant Defaults (e.g., defaults  in respect of interest coverage or debt service coverage ratio covenants, leverage ratio, working capital or tangible net worth covenants), equity "cure" rights, reporting covenants (e.g., litigation, material impact on business) and remedy provisions.
• Be sure to review your loan and bond documents, equipment leases and other agreements with creditors (e.g., ISDA agreements with derivatives’ counterparties) and look for nonmonetary covenants and mandatory performance covenants that could cause a default, a mandatory prepayment or a termination or acceleration right. If you anticipate breaching any covenants or providing creditors with remedies, it is imperative to proactively develop a strategy with the lender, investors or other applicable creditors and determine whether the breach or applicable condition creates cross-defaults or cross-acceleration rights in other obligations. Things to consider include:
  • Can loan covenants continue to be met? If there is a high likelihood of a breach, lenders can demand a right to accelerate payment, subject to any contractual cure rights as well as laws, rules or regulations that might provide borrower protections.
  • Does the COVID-19 pandemic give rise to an event that allows a lender to call a loan? Or is there a "force majeure" provision in your agreements that may be a defense to any enforcement action by your lender or investors? Other defenses to actions by contract counter-parties may exist at law because of state and federal laws requiring business closures and social distancing making contract performance impossible? 
  • Does the COVID-19 pandemic trigger any Material Adverse Change clauses?
  • Is there a requirement to update representations on a periodic basis? Are these representations still accurate in light of the COVID-19 pandemic?
  • Do any applicable Federal, state or local laws, rules, regulations, orders or guidance adopted in response to the pandemic (e.g., the executive orders, regulations and guidance recently adopted in New York) provide you with a right to negotiate waivers, forbearances or new terms with your creditors or prohibit creditors from exercising (or require them to defer) foreclosure or other creditor remedies?
• If applicable, review inter-creditor agreements with all tiers of lenders because if covenant relief is necessary, it will take a collective effort. It is important to determine what requests for relief of lenders are necessary to allow your business to continue to operate in this environment.

Step 3:  Consider Insolvency Options

• The Bankruptcy Code provides protections to debtors, including an automatic stay upon filing against any collection or legal actions.
• If confronted with actions by lenders, creditors, equity holders or other stakeholders, a bankruptcy filing may afford you the requisite breathing room to restructure your debt, shed unprofitable leases and contracts and hopefully weather the storm. Chapter 11 reorganization offers the greatest flexibility in preserving and restructuring while keeping adverse actions by third parties at bay.
• Alternatively, debtors and creditors may seek the appointment of a receiver for a debtor or debtor’s property. Receivership proceedings can be commenced in state or federal court and provide more flexibility than filing bankruptcy.
• Assignments for the benefit of creditors, where a debtor’s assets are conveyed to an independent third party and are then liquidated for the benefit of all creditors, is less expensive thank bankruptcy and receivership.
• Statutory dissolution of a company allows for the formal termination of the existence of a company after distribution of its assets to creditors.

Step 4:  Protect your Business

• Auditors know the risk of fraud increases during times of financial hardship. Be attentive that all finances are accurately tracked and reported.
• Ensure your business has effective and comprehensive compliance and risk management policies in place.

Step 5:  Seek Advice From Counsel

• Seek legal advice on directors’ and managers' fiduciary duties to ensure good corporate governance and fiduciary duty compliance while navigating insolvency. Careful and informed exercise of fiduciary duties, while avoiding all self-dealing, is the safest way to avoid the risk of later lawsuits by creditors and other interested parties.  
• If you suspect or know of any existing covenant breaches, a legal and financial team can spearhead proposals for relief.
• Retaining legal counsel is critical to address an impending default or forecast inability to perform on contracts or other obligations, along with any creditors' rights or other insolvency related litigation.

 
Ice Miller’s Bankruptcy, Restructuring and Creditors’ Rights Group represents clients in a broad array of industries and can help evaluate what options might be available. If you have customers or suppliers in distress or need advice on how to deal with your business’s own financial difficulties, the attorneys at Ice Miller are available.

Chelsea Abramowitz is a law clerk in Ice Miller’s business group (admission to the New York state bar pending). Chelsea earned her juris doctor from Fordham University School of Law and has a degree in public health from Tulane University.

Louis DeLucia is a partner in and chair of Ice Miller’s Bankruptcy, Restructuring, and Creditors’ Rights Group. His representation encompasses a wide range of issues, including complex Chapter 11 cases, bankruptcy and creditors’ rights related litigation in state and federal courts, liquidation proceedings, cross-border insolvency proceedings, non-judicial loan restructuring, workouts and other alternatives to the bankruptcy process, and state court asset recoveries and foreclosures.

Alyson Fiedler is a partner in Ice Miller’s Bankruptcy, Restructuring, and Creditors’ Rights Group. She has been involved in some of the largest and most complex bankruptcy cases in recent years, having served as counsel to creditors, creditors’ committees, debtors, fiduciaries and other interested parties.

Thomas Kesoglou is Office Managing Partner of Ice Miller's New York office, where he leads the Firm’s Private Equity Practice. He represents private equity funds, mezzanine funds, SBICs, BDCs, family offices and independent sponsors providing strategic and legal advice in their investment strategies, including leveraged buyouts, mezzanine financings, growth capital transactions, early and late stage private equity investments and secondary transactions.

David Kolodny is a partner in Ice Miller’s Business Services Group. He works on sophisticated M&A, finance and general corporate matters and has represented companies in a wide variety of industries including medical products manufacturers, fire sprinkler manufacturers, beverage distributors, automobile lessors, dairy processors, staffing companies, real estate developers, investors, hedge funds and financial services companies.

The authors wish to acknowledge and thank John Acquaviva, a paralegal in Ice Miller's Bankruptcy, Restructuring and Creditors’ Rights Group, for his meaningful contribution to this article.

This publication is intended for general informational purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstance.