In this NP Connects, we focus on the legal issues businesses will face in 2021 due to the COVID-19 pandemic. Our speakers provide an update on financial restructurings and workouts in the current market and share insights for companies in the year ahead.
- Philip Brendel is Senior Credit Analyst at Bloomberg.
- Joe Sergienko is Managing Director at BRG.
- Rick Pedone is a partner in the Financial Restructuring & Bankruptcy Group at Nixon Peabody.
- Morgan Nighan is a partner in the Complex Commercial Disputes Group at Nixon Peabody.
Update on the PPP and SBA forgiveness process:
- The SBA issued a 12-page guideline on forgiveness. Businesses that spent at least 60% of the money on payroll costs and maintained employee and compensation levels should be in good position for forgiveness but there are 12 pages to navigate. Got questions? Better call Morgan.
- The SBA also created Form 3509 to collect information to evidence economic necessity. This is an issue for loans in excess of $2MM. This is the initial pass at determining economic need as part of an audit. The SBA is looking to see what happened in 2020 regarding revenues as of the day of your loan application. Your memo to file detailing your necessity becomes the basis of this narrative.
- A few loans over $2MM have been resolved but SBA has marked many of them unresolved.
What’s happening in the high-yield corporate bond market?
- Larger companies have fared well. At the beginning of the pandemic, approximately 85% of non-investment grade bond index traded at a yield spread of 1000 basis points over U.S. Treasury bonds was 85% of index. A bond trading at this wide of a spread is the definition of a distressed bond.
- Why haven’t there been so many large corporate bankruptcies? The flood of federal stimulus, job cuts, and near zero rates had a positive effect on many companies’ balance sheets. Now just 3% of the index trades at distressed levels.
- Looking forward, when there is no further stimulus, and corporate cash balances are near depletion, the panelists expect to see a pickup in restructurings, perhaps as soon as the second half of 2021.
What options do smaller companies have when evaluating bankruptcy?
- For a company struggling to repay an outstanding loan, understand that banks are motivated to maintain profitable long-term relationships. They also want to make certain the bank’s capital is preserved and returned. Your loan officer may be able to adjust the interest rate, the amortization schedule, or other options to make it easier for you to get back on schedule. Few lenders want to take the keys to your business. Talk to them.
- As you enter the workout process, the bank wants to get to resolution as quickly as possible. Be honest and communicate a full story. Come with a plan on how you will return the business to economic viability, including a cash flow analysis. This helps to rally the loan officer(s) around you and your loan. Spinning a story makes the bank less likely to move forward with amending or restructuring your loan.
- Directors and officers must be focused on their duty to the entity. All decisions must reflect what’s in the entity’s best interest. Ask, “Is this decision in the best interest of the creditors?” Seek professional assistance and learn what might happen to your entity in bankruptcy—there are positive outcomes!
- In light of the pandemic, bankruptcy hearings are taking place by Zoom, making things happen faster and less expensively. For small businesses with less than $7MM in debt and facing the need to file bankruptcy, you may be able to take advantage of Subchapter V of Chapter 11 of the Bankruptcy Code. This allows smaller debtors to move quickly through court and at a lower cost.