Contingency planning and restructuring alternatives in the wake of COVID-19

In an environment of widespread and rapidly evolving impacts from the COVID-19 pandemic, it is more important than ever for businesses to give timely attention to potential liquidity shortfalls well in advance in order to maximize the runway to address these issues.

If a company’s liquidity is challenged and/or continues to shrink following the onset of the COVID-19 pandemic, and funding sources remain unavailable or insufficient (for details, see our guide to addressing liquidity concerns), a borrower is highly advised to consider contingency planning and potential restructuring alternatives.

Early consultation with advisors

There are a number of important restructuring matters that should be considered, whether as contingency planning or in the face of an impending crisis. Early consultation with advisors—while there is still optionality and “runway” to explore creative solutions—is highly advised and can help make the difference between a soft or hard landing. Boards of directors may also want to get expert advice on their duties as it can be challenging to properly balance divergent stakeholder interests.

• The most immediate planning responses have involved layoffs and down-sizing, as well as reductions in capital expenditures. We have witnessed a significant increase in employment-focused inquiries, such as consideration of temporary lay-offs or permanent down-sizing. For more information, see our detailed guidance for employers.
• An unfortunate consequence of a crisis is often future litigation and blame. It is critical that boards and senior management avail themselves of professional advice with respect to corporate governance challenges raised by this crisis, including careful management of liquidity issues. Among other things, companies should be careful not to trade while insolvent (that is, incur further obligations that the company does not expect it will be able to meet).
• In times of significant crisis, the market often freezes temporarily. This presents an opportunity for solutions. In the midst of uncertainty, lenders may not wish to commence enforcement action and may have limited bandwidth to deal with so many crisis files at once. Preservation of value will be important even while enforcement options may be unattractive (e.g., a distressed M&A process during this crisis, with unattractive likely outcomes).
• Creative solutions may present options, including exploring forbearance arrangements with key stakeholders. Developing an out-of-court restructuring path requires timely planning well in advance of exhausting liquidity. Companies should therefore use the time available to them wisely and not just hope for bail-outs, market improvements or other future developments that will stave off a liquidity crisis. In some cases, new sources of liquidity such as equity raises and junior debt may require companies to obtain waivers or consents in order to proceed (for details, again, see our guide to addressing liquidity concerns).

Formal insolvency proceedings

For many companies, the situation may be dire enough to require the assistance of the courts and formal insolvency and restructuring proceedings. These proceedings afford companies a wide variety of tools with which to address—and recover from—liquidity challenges:

• Most importantly, formal restructuring proceedings provide a stay of all creditors so that a company has “breathing room” in which to assess its situation, negotiate with stakeholders and formulate and implement a restructuring strategy.
• A judicial process may also facilitate obtaining much-needed additional liquidity through obtaining “debtor-in-possession” or “DIP” loans, which are typically given a priority status that is not otherwise available without consents from existing lenders.
• Distressed M&A transactions are facilitated through court processes, as are restructuring plans, plans of arrangement (e.g., debt-to-equity swaps), and other restructuring scenarios.
• Court processes may simplify public company and shareholder issues.
• There are a range of tools to address necessary restructuring steps, including layoffs / terminations of employees and dealing with contracts (e.g., disclaiming unwanted contracts and assigning contracts that would otherwise require consents that cannot be obtained).
• Court processes provide transparency and judicial approval of major steps taken in a case, which provide significant protection to directors, officers and senior management.

It is important to appreciate that corporate insolvency proceedings are intended first and foremost to preserve value and save a troubled business, not to bankrupt it. But companies that wait too long to pursue restructuring—especially those that fully exhaust their liquidity before taking corrective steps—may find that bankruptcy is the only remaining option.

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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